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Backtesting for risk-based regulatory capital

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  • Kerkhof, Jeroen
  • Melenberg, Bertrand

Abstract

In this paper we present a framework for backtesting all currently popular risk measurement methods (including value-at-risk and expected shortfall) using the functional delta method.Estimation risk can be taken explicitly into account.Based on a simulation study we provide evidence that tests for expected shortfall with acceptable low levels have a better performance than tests for value-at-risk in realistic financial sample sizes.We propose a way to determine multiplication factors, and find that the resulting regulatory capital scheme using expected shortfall compares favorably to the current Basle Accord backtesting scheme.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 28 (2004)
Issue (Month): 8 (August)
Pages: 1845-1865

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Handle: RePEc:eee:jbfina:v:28:y:2004:i:8:p:1845-1865

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Citations

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Cited by:
  1. Clara Cardone-Riportella & Antonio Trujillo-Ponce & Anahí Briozzo, 2013. "Analyzing the role of mutual guarantee societies on bank capital requirements for small and medium-sized enterprises," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(2), pages 142-159, June.
  2. Kerkhof, Jeroen & Melenberg, Bertrand & Schumacher, Hans, 2010. "Model risk and capital reserves," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 267-279, January.
  3. Melenberg, B. & Polbennikov, S.Y., 2005. "Testing for Mean-Coherent Regular Risk Spanning," Discussion Paper 2005-99, Tilburg University, Center for Economic Research.
  4. Wong, Woon K & Copeland, Laurence, 2008. "Risk Measurement and Management in a Crisis-Prone World," Cardiff Economics Working Papers E2008/14, Cardiff University, Cardiff Business School, Economics Section.
  5. Lönnbark, Carl, 2013. "On the role of the estimation error in prediction of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 847-853.
  6. Chen, Qian & Gerlach, Richard H., 2013. "The two-sided Weibull distribution and forecasting financial tail risk," International Journal of Forecasting, Elsevier, vol. 29(4), pages 527-540.
  7. Caio Almeida & José Vicente, 2009. "Are Interest Rate Options Important for the Assessment of Interest Rate Risk?," Working Papers Series 179, Central Bank of Brazil, Research Department.
  8. Memmel, Christoph & Wehn, Carsten, 2005. "The supervisor's portfolio: the market price risk of German banks from 2001 to 2003 - Analysis and models for risk aggregation," Discussion Paper Series 2: Banking and Financial Studies 2005,02, Deutsche Bundesbank, Research Centre.
  9. Sirio Aramonte & Marius del Giudice Rodriguez & Jason J. Wu, 2011. "Dynamic factor value-at-risk for large, heteroskedastic portfolios," Finance and Economics Discussion Series 2011-19, Board of Governors of the Federal Reserve System (U.S.).
  10. Sean D. Campbell, 2005. "A review of backtesting and backtesting procedures," Finance and Economics Discussion Series 2005-21, Board of Governors of the Federal Reserve System (U.S.).
  11. Polbennikov, S.Y. & Melenberg, B., 2005. "Mean-Coherent Risk and Mean-Variance Approaches in Portfolio Selection: An Empirical Comparison," Discussion Paper 2005-100, Tilburg University, Center for Economic Research.
  12. Wong, Woon K., 2008. "Backtesting trading risk of commercial banks using expected shortfall," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1404-1415, July.
  13. Escanciano, J. C. & Olmo, J., 2007. "Estimation risk effects on backtesting for parametric value-at-risk models," Working Papers 07/11, Department of Economics, City University London.
  14. Kerkhof, F.L.J., 2003. "Model Risk Analysis for Risk Management and Option Pricing," Open Access publications from Tilburg University urn:nbn:nl:ui:12-119331, Tilburg University.
  15. Clara Cardone Riportella & Antonio Trujillo Ponce & Maria Jose Casasola, 2008. "Credit risk mitigation and SMEs bank financing in Basel II : the case of the Loan Guarantee Associations," Business Economics Working Papers wb084011, Universidad Carlos III, Departamento de Economía de la Empresa.
  16. Chen, Qian & Gerlach, Richard & Lu, Zudi, 2012. "Bayesian Value-at-Risk and expected shortfall forecasting via the asymmetric Laplace distribution," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3498-3516.
  17. Wong, Woon K., 2010. "Backtesting value-at-risk based on tail losses," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 526-538, June.

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