| By: |
Paulo Araújo Santos (Escola Superior de Gestão e Tecnologia de Santarém and Center of Statistics and Applications, University of Lisbon);
Juan-Ángel Jiménez-Martín (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid);
Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics), Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).);
Teodosio Pérez Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid) |
| Abstract: |
In McAleer et al. (2010b), a robust risk management strategy to the Global
Financial Crisis (GFC) was proposed under the Basel II Accord by selecting a
Value-at-Risk (VaR) forecast that combines the forecasts of different VaR
models. The robust forecast was based on the median of the point VaR forecasts
of a set of conditional volatility models. In this paper we provide further
evidence on the suitability of the median as a GFC-robust strategy by using an
additional set of new extreme value forecasting models and by extending the
sample period for comparison. These extreme value models include DPOT and
Conditional EVT. Such models might be expected to be useful in explaining
financial data, especially in the presence of extreme shocks that arise during
a GFC. Our empirical results confirm that the median remains GFC-robust even
in the presence of these new extreme value models. This is illustrated by
using the S&P500 index before, during and after the 2008-09 GFC. We
investigate the performance of a variety of single and combined VaR forecasts
in terms of daily capital requirements and violation penalties under the Basel
II Accord, as well as other criteria, including several tests for independence
of the violations. The strategy based on the median, or more generally, on
combined forecasts of single models, is straightforward to incorporate into
existing computer software packages that are used by banks and other financial
institutions. |
| Keywords: |
Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis. |
| JEL: |
G32 G11 C53 C22 |
| Date: |
2011 |
| URL: |
http://d.repec.org/n?u=RePEc:ucm:doicae:1127&r=cfn |