Value-at-Risk (VaR) has emerged as the primary risk measurement tool for market risk in the last few years. The Bank of International Settlements(BIS) has suggested banks to measure their market risk using the Value-at-Risk metrics. There are various VaR metrics, which give different results for the same dataset and period. Hence, there is a need to test the effectiveness of these VaR calculation methods. This paper compares various methods of VaR estimation for Fixed Income Securities (FIS) and Equity portfolios. The authors have used portfolios based on indices to represent true portfolios. The indices are the Sensex and the i-Bex. These portfolios have varying weights of FIS and Equity components thus giving rise to two pure and nine hybrid portfolios. Taking 500 VaR numbers generated by various methods like Analytical method, Historical Simulation method and Hull and White Historical Simulation, backtesting has been carried out for these portfolios, using the generally accepted backtesting technique like the Basel traffic light test and the Kupiec tests. The results show that the exceptions are proportionately less at 95% confidence level than at 99% confidence level. This implies leptokurtosis in the returns data. Among these three methods, the Analytical method performs better than the other two methods. The Hull and White method is slightly better than the Historical Simulation Method; the former produces fewer exceptions than the latter.

Risk, in simple terms, is defined as the uncertainty associated with earnings, and therefore, quantification of the risk becomes the first step in risk management in any organization. Bank, as a financial organization, faces, different kinds of risk viz., credit risk, market risk, operation risk, etc. Market risk is also gaining importance though credit risk contributes maximum to the total risk of any bank. Credit risk arises from the primary function of any banking business i.e., lending. Market risk is the uncertainty in the bank's earnings due to changes in the prices of equity, securities, foreign exchange, interest rates, etc., leading to an adverse impact on the banks' portfolio. This is a major concern as banks invest a considerable portion of their portfolios in these instruments. The BIS defines market risk as "The risk that the value of `on' or `off' balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices"(www.bis.org). It is necessary that market risk be measured and maintained within an acceptable level.

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