On the necessity of five risk measures
AbstractThe banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements.
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Date of creation: Jan 2010
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Risk measure ; Value at Risk ; Bank capital ; Basel II Accord;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-20 (All new papers)
- NEP-BAN-2010-03-20 (Banking)
- NEP-BEC-2010-03-20 (Business Economics)
- NEP-CFN-2010-03-20 (Corporate Finance)
- NEP-FMK-2010-03-20 (Financial Markets)
- NEP-REG-2010-03-20 (Regulation)
- NEP-RMG-2010-03-20 (Risk Management)
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