Market risk management in banking: Value at risk (VAR) and stress testing application

Increasing uncertainties in the global financial system with the developments raised after the annihilation of the frontiers has caused destructive results for financial instutitions and especially for the banks which have a leading role in financial markets with their size and functions. All these experiences have led risk management to come into prominence in financial literature and to situate in decision-making processes which is briefly defined as defining, measuring and monitoring process of risks would be encountered. Factors such as increasing facilities of accessing to financial markets with the technological advances, cost decreasing effects of climbing competition and the growing global liquidity have reflected as increasing volatility and risk to financial markets in last recent years. In this era, risk management as an intermediary discipline which is situated at the intersection of mathematics, statistics, econometrics, finance and information technologies has become a crucial tool in managing the risks encountered that varying day to day. This thesis is specifically concerned with the effects of selection of the most efficient Value at Risk model(s) among the widely used models for measuring market risk and the most efficient ARCH/GARCH type model(s) used for modeling the heteroscedasticity in financial asset returns on the management of the capital effectively. Furthermore, the resistance of the capital was examined with stress tests against the extraordinary losses that would be encountered in exceptional market conditions.