| By: |
Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).);
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);
Chia-Lin Chang (NCHU Department of Applied Economics (Taiwan));
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. McAleer, Jimenez-Martin and Perez- Amaral
(2009) proposed a new approach to model selection for predicting VaR,
consisting of combining alternative risk models, and comparing conservative
and aggressive strategies for choosing between VaR models. This paper
addresses the question of risk management of risk, namely VaR of VIX futures
prices. We examine how different risk management strategies performed during
the 2008-09 global financial crisis (GFC). We find that an aggressive strategy
of choosing the Supremum of the single model forecasts is preferred to the
other alternatives, and is robust during the GFC. However, this strategy
implies relatively high numbers of violations and accumulated losses, though
these are admissible under the Basel II Accord. |
| Keywords: |
Median strategy, Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel II Accord, VIX futures, global financial crisis (GFC). |
| JEL: |
G32 G11 C53 C22 |
| Date: |
2011 |
| URL: |
http://d.repec.org/n?u=RePEc:ucm:doicae:1102&r=fmk |