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International Evidence on GFC‐Robust Forecasts for Risk Management under the Basel Accord

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  • Michael McAleer
  • Juan‐Ángel Jiménez‐Martín
  • Teodosio Pérez‐Amaral

Abstract

A risk management strategy that is designed to be robust to the Global Financial Crisis (GFC), in the sense of selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models, was proposed in McAleer et al. (2010c). The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. Such a risk management strategy is robust to the GFC in the sense that, while maintaining the same risk management strategy before, during and after a financial crisis, it will lead to comparatively low daily capital charges and violation penalties for the entire period. This paper presents evidence to support the claim that the median point forecast of VaR is generally GFC-robust. 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. In the empirical analysis, we choose several major indexes, namely French CAC, German DAX, US Dow Jones, UK FTSE100, Hong Kong Hang Seng, Spanish Ibex35, Japanese Nikkei, Swiss SMI and US S&P500. The GARCH, EGARCH, GJR and Riskmetrics models, as well as several other strategies, are used in the comparison. Backtesting is performed on each of these indexes using the Basel II Accord regulations for 2008-10 to examine the performance of the Median strategy in terms of the number of violations and daily capital charges, among other criteria. The Median is shown to be a profitable and safe strategy for risk management, both in calm and turbulent periods, as it provides a reasonable number of violations and daily capital charges. The Median also performs well when both total losses and the asymmetric linear tick loss function are considered

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 32 (2013)
Issue (Month): 3 (04)
Pages: 267-288

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Handle: RePEc:wly:jforec:v:32:y:2013:i:3:p:267-288

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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References

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  1. McAleer, M.J. & Jimenez-Martin, J-A. & Perez-Amaral, T., 2010. "GFC-Robust Risk Management Strategies under the Basel Accord," Econometric Institute Research Papers, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute EI 2010-59, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  2. Ling, Shiqing & McAleer, Michael, 2002. "NECESSARY AND SUFFICIENT MOMENT CONDITIONS FOR THE GARCH(r,s) AND ASYMMETRIC POWER GARCH(r,s) MODELS," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 18(03), pages 722-729, June.
  3. Michael McAleer & Juan-Angel Jimenez-Martin & Teodosio Perez-Amaral, 2009. "Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis?," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-643, CIRJE, Faculty of Economics, University of Tokyo.
  4. Massimiliano Caporin & Michael McAleer, 2010. "Model Selection and Testing of Conditional and Stochastic Volatility Models," KIER Working Papers, Kyoto University, Institute of Economic Research 724, Kyoto University, Institute of Economic Research.
  5. Shiqing Ling & Michael McAleer, 2001. "Asymptotic Theory for a Vector ARMA-GARCH Model," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0549, Institute of Social and Economic Research, Osaka University.
  6. Shiqing Ling & Michael McAleer, 2001. "On Adaptive Estimation in Nonstationary ARMA Models with GARCH Errors," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0548, Institute of Social and Economic Research, Osaka University.
  7. Michael McAleer & Juan-Angel Jimenez-Martin & Teodosio Perez-Amaral, 2009. "A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-644, CIRJE, Faculty of Economics, University of Tokyo.
  8. Shiqing Ling & Michael McAleer, 2001. "Stationarity and the Existence of Moments of a Family of GARCH Processes," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0535, Institute of Social and Economic Research, Osaka University.
  9. Michael Mcaleer & Bernardo da Veiga, 2008. "Forecasting value-at-risk with a parsimonious portfolio spillover GARCH (PS-GARCH) model," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 27(1), pages 1-19.
  10. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 21(01), pages 232-261, February.
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  12. Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-652, CIRJE, Faculty of Economics, University of Tokyo.
  13. Juan-�ngel Jiménez-Martín & Michael McAleer & Teodosio Pérez-Amaral, 2009. "The Ten Commandments For Managing Value At Risk Under The Basel Ii Accord," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 23(5), pages 850-855, December.
  14. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
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  17. Li, W K & Ling, Shiqing & McAleer, Michael, 2002. " Recent Theoretical Results for Time Series Models with GARCH Errors," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(3), pages 245-69, July.
  18. McAleer, Michael & Chan, Felix & Marinova, Dora, 2007. "An econometric analysis of asymmetric volatility: Theory and application to patents," Journal of Econometrics, Elsevier, Elsevier, vol. 139(2), pages 259-284, August.
  19. Michael McAleer & Bernardo da Veiga, 2008. "Single-index and portfolio models for forecasting value-at-risk thresholds," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 27(3), pages 217-235.
  20. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
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