Term Structure and Cyclicity of Value-at-Risk: Consequences for the Solvency Capital Requirement
AbstractThis 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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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2596.
Date of creation: 2009
Date of revision:
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
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