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What Happened to Risk Management During the 2008-09 Financial Crisis?

Jiménez Martín, Juan Ángel and McAleer, Michael and Pérez Amaral, Teodosio (2009) What Happened to Risk Management During the 2008-09 Financial Crisis? [Working Paper or Technical Report] (Unpublished)

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Abstract

When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor’s 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits.

Item Type:Working Paper or Technical Report
Additional Information:JEL Classifications: G32, G11, G17, C53, C22
Uncontrolled Keywords:Risk management, Violations, Aggressive risk strategy, Conservative risk strategy, Value-at-risk forecasts.
Subjects:Social sciences > Economics > Depressions
Social sciences > Economics > Finance
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2009
Number:19
ID Code:9486
References:

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.

Basel Committee on Banking Supervision, (2009), Proposed enhancements to the Basel II framework, Consultative Document, BIS, Basel, Switzerland. (http://www.bis.org/publ/bcbs150.pdf?noframes=1).

Caporin, M. and M. McAleer (2009), The Ten Commandments for managing investments, to appear in Journal of Economic Surveys (Available at SSRN: http://ssrn.com/abstract=1342265).

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).

Jorion, P. (2000), Value at Risk: The New Benchmark for Managing Financial Risk, McGraw-Hill, New York.

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., J.-Á. Jiménez-Martin and T. Pérez-Amaral (2009a), A decision rule to minimize daily capital charges in forecasting value-at-risk, Department of Quantitative Economics, Complutense University of Madrid, Spain (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.

McAleer, M. and B. da Veiga (2008b), Single index and portfolio models for forecasting value-at-risk thresholds, Journal of Forecasting, 27, 217-235.

Deposited On:24 Sep 2009 10:35
Last Modified:06 Feb 2014 08:26

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