The Ten Commandments For Optimizing Value-At-Risk And Daily Capital Charges
AbstractCredit risk is the most important type of risk in terms of monetary value. Another key risk measure is market risk, which is concerned with stocks and bonds, and related financial derivatives, as well as exchange rates and interest rates. This paper is concerned with market risk management and monitoring under the Basel II Accord, and presents Ten Commandments for optimizing value-at-risk (VaR) and daily capital charges, based on choosing wisely from (1) conditional, stochastic and realized volatility; (2) symmetry, asymmetry and leverage; (3) dynamic correlations and dynamic covariances; (4) single index and portfolio models; (5) parametric, semi-parametric and non-parametric models; (6) estimation, simulation and calibration of parameters; (7) assumptions, regularity conditions and statistical properties; (8) accuracy in calculating moments and forecasts; (9) optimizing threshold violations and economic benefits; and (10) optimizing private and public benefits of risk management. For practical purposes, it is found that the Basel II Accord would seem to encourage excessive risk taking at the expense of providing accurate measures and forecasts of risk and VaR. Copyright � 2009 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Economic Surveys.
Volume (Year): 23 (2009)
Issue (Month): 5 (December)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0950-0804
Other versions of this item:
- Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," Documentos del Instituto Complutense de AnÃ¡lisis EconÃ³mico 0910, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
- Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," CARF F-Series CARF-F-164, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," CIRJE F-Series CIRJE-F-652, CIRJE, Faculty of Economics, University of Tokyo.
- McAleer, M.J., 2008. "The ten commandments for optimizing value-at-risk and daily capital charges," Econometric Institute Report EI 2008-32, Erasmus University Rotterdam, Econometric Institute.
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- McAleer, Michael & Chan, Felix & Hoti, Suhejla & Lieberman, Offer, 2008. "Generalized Autoregressive Conditional Correlation," Econometric Theory, Cambridge University Press, vol. 24(06), pages 1554-1583, December.
- Michael McAller & Marcelo C. Medeiros, 2007.
"A multiple regime smooth transition heterogeneous autoregressive model for long memory and asymmetries,"
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544, Department of Economics PUC-Rio (Brazil).
- McAleer, Michael & Medeiros, Marcelo C., 2008. "A multiple regime smooth transition Heterogeneous Autoregressive model for long memory and asymmetries," Journal of Econometrics, Elsevier, vol. 147(1), pages 104-119, November.
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