This thesis deals with the study on the risk management of financial Institutions using VaR(Value-at-Risk) model, new theory of evaluating Risk for financial institutions. Recent research has shown that different methods of computing Value-at-Risk generate widely varying results, suggesting the choice of Value-at-Risk method is very important. The purpose of the study is to provide the risk managers of financial institutions in Korea with the appropriate Value-at-Risk methods. This thesis examines three Value-at-Risk methods by using equity portfolios and compares the three Value-At-Risk methods based on the numbers of Value-at-Risk errors.
As a result, the exponential smoothing method was superior to the others to measure the market risk of financial institutions in Korea. This implies the Korean Stock market is so volatile that the exponential smoothing method which attachs much more weights to the recent observations than earlier observations is the appropriate method to measure the market risk.
However, the VaR model cannot evaluate nontrading account very well. So, this thesis implies the VaR model to the non-trading account, especially deposit and loan accounts and presents the guidelines of how to measure the VaR(Value-at-Risk) on them.
