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Measuring Event Risk

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  • Peter Nyberg
  • Anders Wilhelmsson

Abstract

This paper decomposes the popular risk measure Value-at-Risk (VaR) into one jump- and one continuous component. The continuous component corresponds to general market risk and the jump component is proportional to the event risk as defined in the Basel II accord. We find that event risk, which is currently not incorporated into most banks' VaR models, comprises a substantial part of total VaR. It constitutes 30% of the risk for a portfolio of small cap stocks but less than 1% for a portfolio of large cap stocks. The national supervising agency in each membership country is advised by the Basel rules to add an additional capital charge to a bank whose models do not capture event risk. The large variation in event risk, also found across 10 individual stocks, suggests that an approach that varies the capital surcharge, based on the type of asset, should be used by the supervisors. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbp003
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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 7 (2009)
Issue (Month): 3 (Summer)
Pages: 265-287

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Handle: RePEc:oup:jfinec:v:7:y:2009:i:3:p:265-287

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Cited by:
  1. Jan Novotný & Jan Hanousek & Evžen Kočenda, 2013. "Price Jump Indicators: Stock Market Empirics During the Crisis," William Davidson Institute Working Papers Series wp1050, William Davidson Institute at the University of Michigan.
  2. Jan Hanousek & Evzen Kocenda & Jan Novotny, 2011. "The Identification of Price Jumps," CERGE-EI Working Papers wp434, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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