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Optimal Risk Management Before, During and After the 2008-09 Financial Crisis

McAleer, Michael and Jiménez Martín, Juan Ángel and Pérez Amaral, Teodosio (2009) Optimal Risk Management Before, During and After the 2008-09 Financial Crisis. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 20, 2009, ] (Unpublished)

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Abstract

In this paper we advance the idea that optimal risk management under the Basel II Accord will typically require the use of a combination of different models of risk. This idea is illustrated by analyzing the best empirical models of risk for five stock indexes before, during,and after the 2008-09 financial crisis. The data used are the Dow Jones Industrial Average, Financial Times Stock Exchange 100, Nikkei, Hang Seng and Standard and Poor’s 500 Composite Index. The primary goal of the exercise is to identify the best models for risk management in each period according to the minimization of average daily capital requirements under the Basel II Accord. It is found that the best risk models can and do vary before, during and after the 2008-09 financial crisis. Moreover, it is found that an aggressive risk management strategy, namely the supremum strategy that combines different models of risk, can result in significant gains in average daily capital requirements, relative to the strategy of using single models, while staying within the limits of the Basel II Accord.


Item Type:Working Paper or Technical Report
Additional Information:

JEL Classifications: G32, G11, G17, C53, C22

Uncontrolled Keywords:Optimal risk management, Average daily capital equirements, Alternative risk strategies, Value-at-risk forecasts, Combining risk models.
Subjects:Social sciences > Economics > Finance
Social sciences > Economics > Depressions
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2009
Number:20
ID Code:9478
References:

Basel Committee on Banking Supervision, (1996), Amendment to the Capital Accord to incorporate market risks, BIS, Basel, Switzerland.

Basel Committee on Banking Supervision, (2005), Amendment to the Capital Accord to incorporate market risks, BIS, Basel, Switzerland.

Basel Committee on Banking Supervision, (2009), Proposed enhancements to the Basel II framework, Consultative Document, BIS, Basel, Switzerland.

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Jiménez-Martín, J.-A., McAleer, M. and T. Pérez-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).

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McAleer, M., J.-Á. Jiménez-Martin and T. Pérez-Amaral (2009a), A decision rule to minimize daily capital charges in forecasting value-at-risk, to appear in Journal of Forecasting (Available at SSRN: http://ssrn.com/abstract=1349844).

McAleer, M., J.-Á. Jiménez-Martin and T. Pérez-Amaral (2009b), Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? , Department of Quantitative Economics, Complutense University of Madrid, Spain (Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1397239).

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.

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Deposited On:22 Sep 2009 10:10
Last Modified:06 Feb 2014 08:26

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