The value of Value-at-Risk: A theoretical approach to the pricing and performance of risk measurement systems
AbstractRisk-based capital adequacy requirements are the main tool employed by government regulators to assure bank stability. This approach allows banks to choose from a number of alternative methods for calculating the required capital. Many systems for measuring risk differ significantly in cost, precision, and in the potential “capital savings”. We develop a statistical model for evaluating risk measurement systems and optimizing the selection process. The model is based on queuing theory. The selection of the optimal system is a function of available capital, the volume and the character of bank activity. While the most precise system may lower a bank's minimal capital reserve requirements, it is not necessarily the optimal system once total costs are evaluated.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economics and Business.
Volume (Year): 64 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/jeconbus
Basel accord; Capital adequacy; Risk measurement; Value-at-Risk (VaR); Queuing theory; Erlang formula; Financial institution regulation;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Tim Shepheard-Walwyn & Robert Litterman, 1998. "Building a coherent risk measurement and capital optimisation model for financial firms," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 171-182.
- Vlaar, Peter J. G., 2000. "Value at risk models for Dutch bond portfolios," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1131-1154, July.
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