VALUE-AT-RISK (VaR) FOR LQ – 45 COMPANIES

Abstract

This paper offers a new measurement of risk, Value-at-Risk (VaR) for LQ-45 index in Indonesian Stock Exchange (ISX). Basic finance uses standard deviation in measuring and quantifying the risks. This paper uses VaR as a risk measure by using historical and analytical methods. This study uses the data containing all LQ-45 weekly data from January 1^st, 2005 to December, 31^st 2010. Moreover, this paper also calculates VaR of three indices (IHSG, Dow Jones, and S&P 500) for benchmarking purpose. This study finds that LQ-45 companies have VaR ranging from -5.30 to -41.05 percent with 95 percent level of confidence. It means that we can expect to suffer a minimum weekly loss between 5.30 to 41.05 percent in 5 percent probability when we invest in the LQ-45 companies stocks individually. Furthermore, this study finds that individual LQ-45 stock is riskier than indices based on VaR measure. This paper also concludes that individual LQ-45 stock tends not to follow normal distribution while index tends to follow by comparing their historical and analytical VaR calculation.