Application of credible value at risk in predicting Indonesia’s stock market return

Abstract

Risk is a probability of loss. In financial terms, loss can be interpreted as a possibility that an actual return on an investment will be lower than expected returns. Recent studies develop a new type of risk measures called credible value at risk (CrVaR). Credible value at risk is a model obtained by combining credibility theory and one of the most used risk measures, value at risk (VaR). Credibility theory is a model which gives a proper weight for both information and VaR is used to calculate maximum loss with the specific level of certainty and specific time frame. The combination of credibility theory and VaR is required to get a better value at risk estimation based on individual and group experiences. This paper discusses the model of credible value at risk, its parameter estimation, and focuses on the implementation of credible value at risk to predict the future rate of return from Indonesia’s stock market data.