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Term Structure and Cyclicity of Value-at-Risk: Consequences for the Solvency Capital Requirement

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Author Info
Frédérique Bec ()
Christian Gollier ()

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Abstract

This paper explores empirically the link between French equities returns Value-at-Risk (VaR) and the state of financial markets cycle. The econometric analysis is based on a simple vector autoregression setup. Using quarterly data from 1970Q4 to 2008Q3, it turns out that the k-year VaR of French equities is strongly dependent on the cycle phase: the expected losses as measured by the VaR are twice smaller in recession times than expansion periods. These results strongly suggest that the European rules regarding the solvency capital requirements for insurance companies should adapt to the state of the financial market’s cycle. To this end, we propose a cycle-dependent measure of the Solvency Capital Requirement.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2596.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2596

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Related research
Keywords: expected equities returns; Value at Risk; investment horizon; vector auto-regression;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

References listed on IDEAS
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  1. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278. [Downloadable!] (restricted)
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  2. King, Robert G. & Rebelo, Sergio T., 1993. "Low frequency filtering and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 207-231. [Downloadable!] (restricted)
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  3. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-79, March. [Downloadable!] (restricted)
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  4. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York. [Downloadable!]
  5. Frédérique Bec & Alexia Bastien, 2007. "The Transmission of Aggregate Supply and Aggregate Demand Shocks in Japan: Has There Been a Structural Change?," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 11(4), pages 1342-1342. [Downloadable!] (restricted)
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This page was last updated on 2009-11-3.

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