Forecasting of Value at Risk for Energy Firms in Pakistan

In Pakistan, the reporting of Value at Risk forecast by listed firms is not practiced. This study highlights to the regulator, that forecasting and reporting the Value at Risk with a valid model, will contribute to increased information disclosure on the part of listed firms. This information disclosure can solve the problem of adverse selection due to asymmetric information about the worst possible loss (Value at Risk), which investors with commitments of certain payments in future, face. This study proposes the Variance-Covariance Method to be the best, using the volatility forecasts obtained from valid GARCH type models (GARCH, GARCH-M, GJR). Variance-Covariance Method is compared with Historical Simulation and Monte Carlo Simulation for energy firms in Pakistan. Energy firms are selected from four sectors (Oil and Gas Exploration, Oil and Gas Marketing, Refinery, Power Generation and Distribution). Sum of Binary Loss Function and Quadratic Loss Function are used as evaluation criteria