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Regulatory evaluation of value-at-risk models

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  • Jose A. Lopez

Abstract

Beginning in 1998, commercial banks may determine their regulatory capital requirements for market risk exposure using value-at-risk (VaR) models; i.e., time-series models of the distributions of portfolio returns. Currently, regulators have available three statistical methods for evaluating the accuracy of VaR models: the binomial method, the interval forecast method, and the distribution forecast method. These methods test whether the VaR forecasts in question exhibit properties characteristics of accurate VaR forecasts. However, the statistical tests can have low power against alternative models. A new evaluation method, based on proper scoring rules for probability forecasts, is proposed. Simulation results indicate that this method is clearly capable of differentiating among accurate and alternative VaR models.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9710.

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Date of creation: 1997
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Handle: RePEc:fip:fednrp:9710

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Keywords: Bank capital ; Risk ; Econometric models;

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  1. Granger, C. W. J. & White, Halbert & Kamstra, Mark, 1989. "Interval forecasting : An analysis based upon ARCH-quantile estimators," Journal of Econometrics, Elsevier, vol. 40(1), pages 87-96, January.
  2. Paul H. Kupiec & James M. O'Brien, 1995. "A pre-commitment approach to capital requirements for market risk," Proceedings 475, Federal Reserve Bank of Chicago.
  3. Francis X. Diebold & Jose A. Lopez, 1996. "Forecast Evaluation and Combination," NBER Technical Working Papers 0192, National Bureau of Economic Research, Inc.
  4. Granger, C.W.J. & Pesaran, H., 1996. "A Decision_Theoretic Approach to Forecast Evaluation," Cambridge Working Papers in Economics 9618, Faculty of Economics, University of Cambridge.
  5. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
  6. Chatfield, Chris, 1993. "Calculating Interval Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 121-35, April.
  7. Dimson, Elroy & Marsh, Paul, 1995. " Capital Requirements for Securities Firms," Journal of Finance, American Finance Association, vol. 50(3), pages 821-51, July.
  8. Lopez, Jose A, 2001. "Evaluating the Predictive Accuracy of Volatility Models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 20(2), pages 87-109, March.
  9. Francis X. Diebold & Todd A. Gunther & Anthony S. Tay, 1997. "Evaluating density forecasts," Working Papers 97-6, Federal Reserve Bank of Philadelphia.
  10. J. S. Butler & Barry Schachter, 1996. "Improving Value-At-Risk Estimates By Combining Kernel Estimation With Historical Simulation," Finance 9605001, EconWPA.
  11. Brock, W.A. & Dechert, W.D. & LeBaron, B. & Scheinkman, J.A., 1995. "A Test for Independence Based on the Correlation Dimension," Working papers 9520, Wisconsin Madison - Social Systems.
  12. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
  13. Arturo Estrella, 1995. "A prolegomenon to future capital requirements," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-12.
  14. Darryll Hendricks & Beverly Hirtle, 1997. "Bank capital requirements for market risk: the internal models approach," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-12.
  15. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69.
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Citations

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Cited by:
  1. Jose A. Lopez, 1998. "Methods for evaluating value-at-risk estimates," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 119-124.
  2. Haas, Markus & Mittnik, Stefan & Paolella, Marc S., 2008. "Asymmetric multivariate normal mixture GARCH," CFS Working Paper Series 2008/07, Center for Financial Studies (CFS).
  3. Jeremy Berkowitz, 1999. "Evaluating the forecasts of risk models," Finance and Economics Discussion Series 1999-11, Board of Governors of the Federal Reserve System (U.S.).
  4. Xiongwei Ju & Neil D. Pearson, 1998. "Using Value-at-Risk to Control Risk Taking: How Wrong Can you Be?," Finance 9810002, EconWPA.
  5. Aymen BEN REJEB & Ousama BEN SALHA & Jaleleddine BEN REJEB, 2012. "Value-at-Risk Analysis for the Tunisian Currency Market: A Comparative Study," International Journal of Economics and Financial Issues, Econjournals, vol. 2(2), pages 110-125.
  6. Mark R. Manfredo. & Raymond M. Leuthold, 1999. "Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk," Finance 9908002, EconWPA.
  7. Luiz Renato Lima & Breno Pinheiro Néri, 2006. "Comparing Value-at-Risk Methodologies," Computing in Economics and Finance 2006 1, Society for Computational Economics.
  8. L. Kourouma & D. Dupre & G. Sanfilippo & O. Taramasco, 2011. "Extreme Value at Risk and Expected Shortfall during Financial Crisis," Post-Print halshs-00658495, HAL.
  9. Michael Clements, 2006. "Evaluating the survey of professional forecasters probability distributions of expected inflation based on derived event probability forecasts," Empirical Economics, Springer, vol. 31(1), pages 49-64, March.
  10. Michael P. Clements & Nick Taylor, 2003. "Evaluating interval forecasts of high-frequency financial data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 445-456.
  11. Jose A. Lopez & Marc R. Saidenberg, 1999. "Evaluating credit risk models," Working Papers in Applied Economic Theory 99-06, Federal Reserve Bank of San Francisco.
  12. William E. Nganje & Mounir Siaplay & Simeon Kaitibie & Emmanuel T. Acquah, 2006. "Predicting food safety losses in turkey processing and the economic incentives of hazard analysis and critical control point (HACCP) intervention," Agribusiness, John Wiley & Sons, Ltd., vol. 22(4), pages 475-489.
  13. Stephanos Papadamou & George Stephanides, 2004. "Evaluating the style-based risk model for equity mutual funds investing in Europe," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 751-760.
  14. Sean D. Campbell, 2005. "A review of backtesting and backtesting procedures," Finance and Economics Discussion Series 2005-21, Board of Governors of the Federal Reserve System (U.S.).
  15. Manfredo, Mark R. & Leuthold, Raymond M., 1999. "Measuring Market Risk Of The Cattle Feeding Margin: An Application Of Value-At-Risk Analysis," 1999 Annual meeting, August 8-11, Nashville, TN 21628, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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