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Has the Basel Accord Improved Risk Management During the Global Financial Crisis?

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  • McAleer, M.J.
  • Jimenez-Martin, J-A.
  • Perez-Amaral, T.

Abstract

The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index.

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Paper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number EI 2012-29.

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Handle: RePEc:dgr:eureir:1765037622

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Related research

Keywords: C22; C53; G11; G32; daily capital charges; optimizing strategy; violation penalties; G17; aggressive or conservative risk management strategies; risk forecasts; Basel accord; global financiel crisis; value-at-risk (VaR);

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  1. Shiqing Ling & Michael McAleer, 2001. "Asymptotic Theory for a Vector ARMA-GARCH Model," ISER Discussion Paper 0549, Institute of Social and Economic Research, Osaka University.
  2. McAleer, Michael & Chan, Felix & Marinova, Dora, 2007. "An econometric analysis of asymmetric volatility: Theory and application to patents," Journal of Econometrics, Elsevier, vol. 139(2), pages 259-284, August.
  3. Michael McAleer & Juan-Ángel Jiménez-Martín & Teodosio Pérez-Amaral, 2011. "International Evidence on GFC-robust Forecasts for Risk Management under the Basel Accord," Working Papers in Economics 11/05, University of Canterbury, Department of Economics and Finance.
  4. Shiqing Ling & Michael McAleer, 2001. "Stationarity and the Existence of Moments of a Family of GARCH Processes," ISER Discussion Paper 0535, Institute of Social and Economic Research, Osaka University.
  5. Massimiliano Caporin & Michael McAleer, 2010. "The Ten Commandments For Managing Investments," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 196-200, 02.
  6. Juan-Ángel Jiménez-Martín & Michael McAleer & Teodosio Pérez-Amaral, 2009. "A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk," Documentos del Instituto Complutense de Análisis Económico 0907, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  7. Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," CIRJE F-Series CIRJE-F-652, CIRJE, Faculty of Economics, University of Tokyo.
  8. Michael McAleer & Les Oxley, 2005. "The Ten Commandments for Academics," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 823-826, December.
  9. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  10. Massimiliano Caporin & Michael McAleer, 2009. "Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models," CIRJE F-Series CIRJE-F-638, CIRJE, Faculty of Economics, University of Tokyo.
  11. Li, W K & Ling, Shiqing & McAleer, Michael, 2002. " Recent Theoretical Results for Time Series Models with GARCH Errors," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 245-69, July.
  12. Shiqing Ling & Michael McAleer, 2001. "Necessary and Sufficient Moment Conditions for the GARCH(r,s) and Asymmetric Power GARCH(r,s) Models," ISER Discussion Paper 0534, Institute of Social and Economic Research, Osaka University.
  13. Roxana Chiriac & Winfried Pohlmeier, 2010. "How Risky Is the Value at Risk?," Working Paper Series 07_10, The Rimini Centre for Economic Analysis.
  14. Michael McAleer & Juan-Ángel Jiménez-Martín & Teodosio Pérez-Amaral, 2010. "GFC-Robust Risk Management Strategies under the Basel Accord," Working Papers in Economics 10/63, University of Canterbury, Department of Economics and Finance.
  15. Shiqing Ling & Michael McAleer, 2001. "On Adaptive Estimation in Nonstationary ARMA Models with GARCH Errors," ISER Discussion Paper 0548, Institute of Social and Economic Research, Osaka University.
  16. Juan-�ngel Jiménez-Martín & Michael McAleer & Teodosio Pérez-Amaral, 2009. "The Ten Commandments For Managing Value At Risk Under The Basel Ii Accord," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 850-855, December.
  17. Michael McAleer & Bernardo da Veiga, 2008. "Single-index and portfolio models for forecasting value-at-risk thresholds," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(3), pages 217-235.
  18. Pérignon, Christophe & Deng, Zi Yin & Wang, Zhi Jun, 2008. "Do banks overstate their Value-at-Risk?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 783-794, May.
  19. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, vol. 21(01), pages 232-261, February.
  20. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  21. Michael Mcaleer & Bernardo da Veiga, 2008. "Forecasting value-at-risk with a parsimonious portfolio spillover GARCH (PS-GARCH) model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(1), pages 1-19.
  22. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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