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Scenario Based Principal Component Value-at-Risk: an Application to Italian Banks' Interest Rate Risk Exposure

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Author Info
Roberta Fiori () (Banca d'Italia)
Simonetta Iannotti () (Banca d'Italia)
Abstract

The paper develops a Value-at-Risk methodology to assess Italian banksÂ’ interest rate risk exposure. By using 5 years of daily data, the exposure is evaluated through a Principal Component VaR based on Monte Carlo simulation according to two different approaches (parametric and non-parametric). The main contribution of the paper is a methodology for modelling interest rate changes when underlying risk factors are skewed and heavy-tailed. The methodology is then implemented on a one year holding period in order to compare the results from those resulting from the Basel II standardized approach. We find that the risk measure proposed by Basel II gives an adequate description of risk, provided that duration parameters are changed to reflect market conditions. Finally, the methodology is used to perform a stress testing analysis.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 602.

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Date of creation: Sep 2006
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Handle: RePEc:bdi:wptemi:td_602_06

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Related research
Keywords: Interest rate risk VAR PCA Non-normality Non parametric methods

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Other
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Marchetti, D.J., 1999. "Markup and the Business Cycle: Evidence from Italian Manufacturing Branches," Papers 362, Banca Italia - Servizio di Studi.
  2. Bonaccorsi di Patti, Emilia & Gobbi, Giorgio, 2001. "The changing structure of local credit markets: Are small businesses special?," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2209-2237, December. [Downloadable!] (restricted)
  3. Piero Cipollone, 2001. "La convergenza dei salari manifatturieri in Europa," Temi di discussione (Economic working papers) 398, Bank of Italy, Economic Research Department. [Downloadable!]
  4. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005. "'Some contagion, some interdependence': More pitfalls in tests of financial contagion," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1177-1199, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sabrina Di Addario, 2006. "Job Search in Thick Markets: Evidence from Italy," Temi di discussione (Economic working papers) 605, Bank of Italy, Economic Research Department. [Downloadable!]
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  2. Andrea Nobili & Stefano Neri, 2006. "The transmission of monetary policy shocks from the US to the euro area," Temi di discussione (Economic working papers) 606, Bank of Italy, Economic Research Department. [Downloadable!]
  3. Pietro Tommasino, 2006. "The Political Economy of Investor Protection," Temi di discussione (Economic working papers) 604, Bank of Italy, Economic Research Department. [Downloadable!]
  4. Claudia Biancotti, 2006. "A Dual-Regime Utility Model for Poverty Analysis," Temi di discussione (Economic working papers) 603, Bank of Italy, Economic Research Department. [Downloadable!]
  5. Luca Dedola & Stefano Neri, 2006. "What does a technology shock do? A VAR analysis with model-based sign restrictions," Temi di discussione (Economic working papers) 607, Bank of Italy, Economic Research Department. [Downloadable!]
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