McAleer, Michael and Jimenez-Martin, Juan-Angel and Pérez Amaral, Teodosio (2009) Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 18, 2009, ] (Unpublished)
Official URL: http://eprints.ucm.es/8849/
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. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, discuss the selection of optimal risk models, consider combining
alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk
management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how risk management practices were monitored and encouraged by the Basel II Accord regulations during the financial crisis.
|Item Type:||Working Paper or Technical Report|
JEL Classifications: G32, G11, G17, C53, C22.
|Uncontrolled Keywords:||Value-at-Risk (VaR), Daily capital charges, Exogenous and endogenous violations, Violation penalties, Optimizing strategy, Risk forecasts,Aggressive or conservative risk management strategies, Basel II Accord, Financial crisis.|
|Subjects:||Social sciences > Economics > Depressions|
Social sciences > Economics > Finance
|Series Name:||Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)|
Basel Committee on Banking Supervision, (1988), International Convergence of Capital Measurement and Capital Standards, BIS, Basel, Switzerland.
Basel Committee on Banking Supervision, (1995), An Internal Model-Based Approach to Market Risk Capital Requirements, BIS, Basel, Switzerland.
Basel Committee on Banking Supervision, (1996), Supervisory Framework for the Use of “Backtesting” in Conjunction with the Internal Model-Based Approach to Market Risk Capital Requirements, BIS, Basel, Switzerland.
Berkowitz, J. and J. O'Brien (2001), How accurate are value-at-risk models at commercial banks?, Discussion Paper, Federal Reserve Board.
Black, F. (1976), Studies of stock market volatility changes, in 1976 Proceedings of the American Statistical Association, Business and Economic Statistics Section, pp. 177-181.
Bollerslev, T. (1986), Generalised autoregressive conditional heteroscedasticity, Journal of Econometrics, 31, 307-327.
Caporin, M. and M. McAleer (2009a), Do we really need both BEKK and DCC? A tale of two covariance models (Available at SSRN: http://ssrn.com/abstract=1338190).
Caporin, M. and M. McAleer (2009b), The Ten Commandments for managing investments, to appear in Journal of Economic Surveys (Available at SSRN: http://ssrn.com/abstract=1342265).
Engle, R.F. (1982), Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation, Econometrica, 50, 987-1007.
Franses, P.H. and D. van Dijk (1999), Nonlinear Time Series Models in Empirical Finance, Cambridge, Cambridge University Press.
Gizycki, M. and N. Hereford (1998), Assessing the dispersion in banks’ estimates of market risk: the results of a value-at-risk survey, Discussion Paper 1, Australian Prudential Regulation Authority.
Glosten, L., R. Jagannathan and D. Runkle (1992), On the relation between the expected value and volatility of nominal excess return on stocks, Journal of Finance, 46, 1779-1801.
Jimenez-Martin, J.-A., McAleer, M. and T. Peréz-Amaral (2009), The Ten Commandments for managing value-at-risk under the Basel II Accord, to appear in Journal of Economic Surveys (Available at SSRN: http://ssrn.com/abstract=1356803).
Jorion, P. (2000), Value at Risk: The New Benchmark for Managing Financial Risk, McGraw-Hill, New York.
Li, W.K., S. Ling and M. McAleer (2002), Recent theoretical results for time series models with GARCH errors, Journal of Economic Surveys, 16, 245-269. Reprinted in M. McAleer and L. Oxley (eds.), Contributions to Financial Econometrics: Theoretical and Practical Issues, Blackwell, Oxford, 2002, pp. 9-33.
Ling, S. and M. McAleer (2002a), Stationarity and the existence of moments of a family of GARCH processes, Journal of Econometrics, 106, 109-117.
Ling, S. and M. McAleer (2002b), Necessary and sufficient moment conditions for the GARCH(r,s) and asymmetric power GARCH(r, s) models, Econometric Theory, 18, 722-729.
Ling, S. and M. McAleer, (2003a), Asymptotic theory for a vector ARMA-GARCH model, Econometric Theory, 19, 278-308.
Ling, S. and M. McAleer (2003b), On adaptive estimation in nonstationary ARMA models with GARCH errors, Annals of Statistics, 31, 642-674.
McAleer, M. (2005), Automated inference and learning in modeling financial volatility, Econometric Theory, 21, 232-261.
McAleer, M. (2008), The Ten Commandments for optimizing value-at-risk and daily capital charges, to appear in Journal of Economic Surveys (Available at SSRN: http://ssrn.com/abstract=1354686).
McAleer, M., F. Chan and D. Marinova (2007), An econometric analysis of asymmetric volatility: theory and application to patents, Journal of Econometrics, 139, 259-284.
McAleer, M., J.-Á. Jiménez-Martin and T. Peréz-Amaral (2009), A decision rule to minimize daily capital charges in forecasting value-at-risk (Available at SSRN: http://ssrn.com/abstract=1349844).
McAleer, M. and B. da Veiga (2008a), Forecasting value-at-risk with a parsimonious portfolio spillover GARCH (PS-GARCH) model, Journal of Forecasting, 27, 1-19.
McAleer, M. and B. da Veiga (2008b), Single index and portfolio models for forecasting value-at-risk thresholds, Journal of Forecasting, 27, 217-235.
Nelson, D.B. (1991), Conditional heteroscedasticity in asset returns: a new approach, Econometrica, 59, 347-370.
RiskmetricsTM (1996), J.P. Morgan Technical Document, 4th Edition, New York, J.P. Morgan.
Shephard, N. (1996), Statistical aspects of ARCH and stochastic volatility, in O.E. Barndorff-Nielsen, D.R. Cox and D.V. Hinkley (eds.), Statistical Models in Econometrics, Finance and Other Fields, Chapman & Hall, London, pp. 1-67.
Stahl, G. (1997), Three cheers, Risk, 10, 67-69.
|Deposited On:||11 May 2009 10:32|
|Last Modified:||19 Jun 2015 10:59|
Repository Staff Only: item control page