| By: |
Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University);
Roberto Casarin (Department of Economics Ca’Foscari University of Venice);
Chia-Lin Chang (Department of Applied Economics Department of Finance National Chung Hsing University Taichung, Taiwan);
Juan-Ángel Jiménez-Martín (Department of Quantitative Economics Complutense University of Madrid);
Teodosio Pérez-Amaral (Department of Quantitative Economics Complutense University of Madrid) |
| Abstract: |
It is well known that the Basel II Accord requires banks and other Authorized
Deposit-taking Institutions (ADIs) to communicate their daily risk forecasts
to the appropriate monetary authorities at the beginning of each trading day,
using one or more risk models, whether individually or as combinations, 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 et al. (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, and extends the approaches given in McAleer et al.
(2009) and Chang et al. (2011) to examine how different risk management
strategies performed during the 2008-09 global financial crisis (GFC). The
empirical results suggest that an aggressive strategy of choosing the Supremum
of single model forecasts, as compared with Bayesian and non-Bayesian
combinations of models, is preferred to other alternatives, and is robust
during the GFC. However, this strategy implies relatively high numbers of
violations and accumulated losses, which are admissible under the Basel II
Accord. |
| Keywords: |
Median strategy, Value-at-Risk, daily capital charges, violation penalties, aggressive risk management, conservative risk management, Basel Accord, VIX futures, Bayesian strategy, quantiles, forecast densities. |
| JEL: |
G32 C53 C22 C11 |
| Date: |
2011–07 |
| URL: |
http://d.repec.org/n?u=RePEc:kyo:wpaper:784&r=fmk |