| By: |
Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam.);
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);
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: |
The Basel II Accord requires that banks and other Authorized Deposit-taking
Institutions (ADIs) communicate their daily risk forecasts to the appropriate
monetary authorities at the beginning of each trading day, using one or more
risk models to measure Value-at-Risk (VaR). The risk estimates of these models
are used to determine capital requirements and associated capital costs of
ADIs, depending in part on the number of previous violations, whereby realised
losses exceed the estimated VaR. In this paper we define risk management in
terms of choosing from a variety of risk models, and discuss the selection of
optimal risk models. A new approach to model selection for predicting VaR is
proposed, consisting of combining alternative risk models, and we compare
conservative and aggressive strategies for choosing between VaR models. We
then examine how different risk management strategies performed during the
2008-09 global financial crisis. These issues are illustrated using Standard
and Poor’s 500 Composite Index. |
| Keywords: |
Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel Accord, global financial crisis. |
| JEL: |
G32 G11 G17 C53 C22 |
| Date: |
2012–10 |
| URL: |
http://d.repec.org/n?u=RePEc:ucm:doicae:1226&r=cfn |