GFC-Robust Risk Management Strategies under the Basel Accord



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McAleer, Michael and Jiménez-Martín, Juan-Ángel and Pérez-Amaral, Teodosio (2010) GFC-Robust Risk Management Strategies under the Basel Accord. [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 01, 2010, ]

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A risk management strategy is proposed as being robust to the Global Financial Crisis (GFC) by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. This risk management strategy is GFC-robust in the sense that maintaining the same risk management strategies before, during and after a financial crisis would lead to comparatively low daily capital charges and violation penalties. The new method is illustrated by using the S&P500 index before, during and after the 2008-09 global financial crisis. 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. The median VaR risk management strategy is GFC-robust as it provides stable results across different periods relative to other VaR forecasting models. The new strategy based on combined forecasts of single models is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

Item Type:Working Paper or Technical Report
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JEL Classifications: G32, G11, G17, C53, C22

Uncontrolled Keywords:Value-at-Risk (VaR), Daily capital charges, Robust forecasts, Violation penalties, Optimizing strategy, Aggressive risk management strategy, Conservative risk management strategy, Basel II Accord, Global financial crisis.
Subjects:Social sciences > Economics > Finance
Social sciences > Economics > Depressions
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
ID Code:11322
Deposited On:15 Oct 2010 13:30
Last Modified:16 Feb 2022 09:30

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