| By: |
Chia-Lin Chang (Department of Applied Economics, Department of Finance, National Chung Hsing University, Taiwan);
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);
Esfandiar Maasoumi (Department of Economics, Emory University);
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 III 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 of a
range of alternative risk models to forecast Value-at-Risk (VaR). The risk
estimates from these models are used to determine the daily capital charges
(DCC) and associated capital costs of ADIs, depending in part on the number of
previous violations, whereby realized losses exceed the estimated VaR. In this
paper we define risk management in terms of choosing sensibly from a variety
of risk models and discuss the optimal selection of financial risk models. A
previous approach to model selection for predicting VaR proposed combining
alternative risk models and ranking such models on the basis of average DCC.
This method is based only on the first moment of the DCC distribution,
supported by a restrictive evaluation function. In this paper, we consider
uniform rankings of models over large classes of evaluation functions that may
reflect different weights and concerns over different intervals of the
distribution of losses and DCC. The uniform rankings are based on recently
developed statistical tests of stochastic dominance (SD). The SD tests are
illustrated using the prices and returns of VIX futures. The empirical
findings show that the tests of SD can rank different pairs of models to a
statistical degree of confidence, and that the alternative (recentered) SD
tests are in general agreement. |
| Keywords: |
Stochastic dominance; Value-at-Risk; daily capital charges; violation penalties; optimizing strategy; Basel III Accord; VIX futures; global financial crisis. |
| JEL: |
G32 G11 G17 C53 C22 |
| Date: |
2014 |
| URL: |
http://d.repec.org/n?u=RePEc:ucm:doicae:1408&r=cfn |