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The Ten Commandments for Managing Value-at-Risk Under the Basel II Accord

Jiménez Martín, Juan Ángel and McAleer, Michael and Pérez Amaral, Teodosio (2009) The Ten Commandments for Managing Value-at-Risk Under the Basel II Accord. [Working Paper or Technical Report]

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Abstract

Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions (ADIs) are required to communicate their daily market risk estimates to the relevant national monetary authority at the beginning of each trading day, using one of a variety of Value-at-Risk (VaR) models to measure risk. The purpose of this paper is to provide a simple explanation and a set of prescriptions for managing VaR under the Basel II Accord. The commandments deal with understanding the Basel II colours,understanding the risk model before choosing, varying the choice of risk model,avoiding the green zone and being willing to violate, incurring large violations, stopping before the red zone, avoiding frequent violations, avoiding the estimation of large portfolios, aggregating portfolios into a single index, and interpreting commandments sensibly as guidelines.

Item Type:Working Paper or Technical Report
Additional Information:JEL Classifications: G32, G11, G17.
Uncontrolled Keywords:Financial portfolios, Daily capital Charges, Frequency of violations, Magnitude of violations, Optimizing strategy, Risk forecasts, Value-at-risk, Green zone, Red zone.
Subjects:Social sciences > Economics > Finance
Social sciences > Economics > Accounting
Series Name: Documentos de trabajo del Instituto Complutense de Análisis Económico.
Volume:2009
Number:12
ID Code:8691
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Deposited On:24 Mar 2009 12:08
Last Modified:06 Feb 2014 08:12

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