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Bank Capital and Value at Risk

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  • Patricia Jackson
  • David Maude
  • William Perraudin

Abstract

To measure the risks involved in their trading operations, major banks are increasingly employing Value-at-Risk (VaR) models. In an important regulatory innovation, the Basle Committee has accepted that such models can be used in the determination of the capital that banks must hold to back their securities trading. This paper examines the empirical performance of different VaR models using data on the actual fixed income, foreign exchange and equity security holdings of a large bank. It also examines how a bank applying the models would have fared in the past if the proposed rules had been in operation.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1998/wp79.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 79.

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Date of creation: May 1998
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Handle: RePEc:boe:boeewp:79

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  1. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  2. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  3. Arturo Estrella, 1995. "Taylor, Black and Scholes: series approximations and risk management pitfalls," Research Paper, Federal Reserve Bank of New York 9501, Federal Reserve Bank of New York.
  4. Dimson, Elroy & Marsh, Paul, 1995. " Capital Requirements for Securities Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 50(3), pages 821-51, July.
  5. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-24, Board of Governors of the Federal Reserve System (U.S.).
  6. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Apr, pages 39-69.
  7. Paul H. Kupiec & James M. O'Brien, 1995. "Recent developments in bank capital regulation of market risks," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-51, Board of Governors of the Federal Reserve System (U.S.).
  8. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
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Citations

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Cited by:
  1. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2005. "Practical volatility and correlation modeling for financial market risk management," CFS Working Paper Series 2005/02, Center for Financial Studies (CFS).
  2. Longin, François, 1999. "From Value at Risk to Stress Testing: The Extreme Value Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2161, C.E.P.R. Discussion Papers.
  3. Wai Yan Cheng & Michael Chak Sham Wong & Clement Yuk Pang Wong, 2003. "Market risk management of banks: implications from the accuracy of Value-at-Risk forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 22(1), pages 23-33.
  4. Broll, Udo & Wahl, Jack E., 2003. "Value at risk, bank equity and credit risk," Dresden Discussion Paper Series in Economics 04/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  5. David Blake & John Cotter & Kevin Dowd, 2011. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," Papers 1103.5978, arXiv.org.
  6. David E Allen & Akhmad R. Kramadibrata & R. J. Powell & Abhay Kumar Singh, 2011. "Comparing Australian and US Corporate Default Risk using Quantile Regression," Working papers, Edith Cowan University, School of Business 2011-04, Edith Cowan University, School of Business.
  7. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Ratings versus equity-based credit risk modelling: an empirical analysis," Bank of England working papers, Bank of England 132, Bank of England.
  8. Arupratan Daripa & Simone Varotto, 1998. "Value at risk and precommitment: approaches to market risk regulation," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 137-143.
  9. Gonzalo Cortazar & Alejandro Bernales & Diether Beuermann, 2005. "Methodology and Implementation of Value-at-Risk Measures in Emerging Fixed-Income Markets with Infrequent Trading," Finance, EconWPA 0512030, EconWPA.
  10. Arupratan Daripa & Simone Varotto, 1997. "Agency Incentives and Reputational Distortions: a Comparison of the Effectiveness of Value-at-Risk and Pre-commitment in Regulating Market Risk," Bank of England working papers, Bank of England 69, Bank of England.
  11. Krainer, Robert E., 2002. "Banking in a theory of the business cycle: a model and critique of the Basle Accord on risk-based capital requirements for banks," International Review of Law and Economics, Elsevier, Elsevier, vol. 21(4), pages 413-433, May.
  12. Mark R. Manfredo & Raymond M. Leuthold, 1998. "Agricultural Applications of Value-at-Risk Analysis: A Perspective," Finance, EconWPA 9805002, EconWPA.
  13. Mark R. Manfredo. & Raymond M. Leuthold, 1999. "Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk," Finance, EconWPA 9908002, EconWPA.
  14. Flavio Bazzana, 2001. "I modelli interni per la valutazione del rischio di mercato secondo l'approccio del Value at Risk," Alea Tech Reports, Department of Computer and Management Sciences, University of Trento, Italy 011, Department of Computer and Management Sciences, University of Trento, Italy, revised 14 Jun 2008.
  15. Christian A. Johnson, 2002. "Value at Risk: Teoría y Aplicaciones," Working Papers Central Bank of Chile, Central Bank of Chile 136, Central Bank of Chile.

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