Research on Risk Measurement in Financial Market Based on GARCH-VaR and FHS——An Example of Chinese Bond Market

Abstract

Accurately measuring the risk of bond market is very important for improving the risk management level of bond market and maintaining the stability of the financial system. Taking ChinaBond New Composite Wealth (gross) Index as the research object, this paper selects the closing price from January 1, 2002 to March 30, 2018, establishes the GARCH, EGARCH and GJR-GARCH model based on normal distribution and t distribution, and finds out the volatility aggregation and the leverage effect of the bond market. Then, this paper use two methods  to measure the risk of the bond market: first, we estimate the value at risk (VaR) of the bond market by the parameter method, using conditional variance estimated by the GARCH models, and we carry out backtesting analysis and the Kupiec failure rate test on measurement accuracy of VaR. The results show that t distribution hypothesis and elimination of autocorrelation of the yield rate can improve the accuracy and robustness of the estimation of the VaR; second, we simulate the future revenue path of the bond market and compare it with the actual loss, using Filtered Historical Simulation (FHS) based on Bootstrap method. The results show that the bond market has leverage effect. The maximum possible loss under extreme conditions can be far greater than the maximum possible revenue. But the estimated VaR under 95% confidence level can predict future risks very well. Finally, according to the conclusion, this paper puts forward some suggestions for regulators and investors from the perspective of risk management.