McAleer, Michael and Jiménez Martín, Juan Ángel and Pérez Amaral, Teodosio (2011) International Evidence on GFC-robust Forecasts for Risk Management under the Basel Accord. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico; nº 01, 2011, ] (Unpublished)
Available under License Creative Commons Attribution.
Official URL: http://eprints.ucm.es/12020/
A risk management strategy that is designed to be robust to the Global Financial Crisis
(GFC), in the sense of selecting a Value-at-Risk (VaR) forecast that combines the
forecasts of different VaR models, was proposed in McAleer et al. (2010c). The robust
forecast is based on the median of the point VaR forecasts of a set of conditional
volatility models. Such a risk management strategy is robust to the GFC in the sense
that, while maintaining the same risk management strategy before, during and after a
financial crisis, it will lead to comparatively low daily capital charges and violation
penalties for the entire period. This paper presents evidence to support the claim that the
median point forecast of VaR is generally GFC-robust. 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. In the
empirical analysis, we choose several major indexes, namely French CAC, German
DAX, US Dow Jones, UK FTSE100, Hong Kong Hang Seng, Spanish Ibex35, Japanese
Nikkei, Swiss SMI and US S&P500. The GARCH, EGARCH, GJR and Riskmetrics
models, as well as several other strategies, are used in the comparison. Backtesting is
performed on each of these indexes using the Basel II Accord regulations for 2008-10 to
examine the performance of the Median strategy in terms of the number of violations
and daily capital charges, among other criteria. The Median is shown to be a profitable
and safe strategy for risk management, both in calm and turbulent periods, as it provides
a reasonable number of violations and daily capital charges. The Median also performs
well when both total losses and the asymmetric linear tick loss function are considered
|Item Type:||Working Paper or Technical Report|
JEL Classifications: G32, G11, G17, C53, C22.
|Uncontrolled Keywords:||Median strategy, Value-at-Risk (VaR), Daily capital charges, Robust forecasts, Violation penalties, Optimizing strategy, Aggressive risk management, Conservative risk management, Basel II Accord, Global financial crisis (GFC).|
|Subjects:||Social sciences > Economics > Finance|
|Series Name:||Documentos de Trabajo del Instituto Complutense de Análisis Económico|
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|Deposited On:||17 Jan 2011 11:18|
|Last Modified:||15 Nov 2013 10:52|
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