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Market Risk: An introduction to the concept & analytics of Value-at-risk

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Author Info

  • Frain, John

    (Central Bank and Financial Services Authority of Ireland)

  • Meegan, Conor

    (Central Bank and Financial Services Authority of Ireland)

Abstract

In recent years the concept of Value-at-risk has achieved prominence among risk managers for the purpose of market risk measurement and control. Spurred by the increasing complexity and volume of trade in derivatives, and by the numerous headline cases of institutions sustaining enormous losses from their derivatives activities, risk managers have acknowledged the need for a unified risk measurement and management strategy. Furthermore, the regulatory authorities, recognising the systemic threat posed by the growth and complexity of derivatives trading, moved swiftly to address this problem. As a result, the European Union approved EC/93/6, "The Capital Adequacy Directive", which mandates financial institutions to quantify and measure risk on an aggregate basis and to set aside capital to cover potential losses which might accrue from their market positions. More recently, the Basle committee of the BIS published an amendment to the "Capital Accord" which makes provision for the use of proprietary in-house models to be employed instead of the original framework. The proposed basis of these in-house models is the value-at-risk framework. In this paper, we present an introductory exposition to the concept of Value-at-risk describing, among other things, the methods commonly employed in its calculation, and a brief critique of each.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 7/RT/96.

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Length: 23 pages
Date of creation: Dec 1996
Date of revision:
Handle: RePEc:cbi:wpaper:7/rt/96

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  1. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 36, pages 394.
  2. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Westerfield, Janice Moulton, 1977. "An examination of foreign exchange risk under fixed and floating rate regimes," Journal of International Economics, Elsevier, Elsevier, vol. 7(2), pages 181-200, May.
  4. 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.
  5. Theodossiou, Panayiotis & Lee, Unro, 1993. "Mean and Volatility Spillovers across Major National Stock Markets: Further Empirical Evidence," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 337-50, Winter.
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Cited by:
  1. John C. Frain, 2008. "Value at Risk (VaR) and the alpha-stable distribution," Trinity Economics Papers, Trinity College Dublin, Department of Economics tep0308, Trinity College Dublin, Department of Economics, revised May 2008.

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