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

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Author Info

  • Michael McAleer

    (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute The Netherlands and Institute of Economic Research Kyoto University and Department of Quantitative Economics Complutense University of Madrid)

  • Juan-Angel Jimenez-Martin

    (Department of Quantitative Economics Complutense University of Madrid)

  • Teodosio Perez-Amaral

    (Department of Quantitative Economics Complutense University of Madrid)

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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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 832.

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Length: 34pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:kyo:wpaper:832

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Keywords: Value-at-Risk (VaR); daily capital charges; violation penalties; optimizing strategy; risk forecasts; aggressive or conservative risk management strategies; Basel Accord; global financial crisis.;

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References

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  1. Bernardo da Veiga & Felix Chan & Michael McAleer, 2012. "It pays to violate: how effective are the Basel accord penalties in encouraging risk management?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, Accounting and Finance Association of Australia and New Zealand, vol. 52(1), pages 95-116, 03.
  2. McAleer, M.J. & Jimenez-Martin, J-A. & Perez-Amaral, T., 2008. "A decision rule to minimize daily capital charges in forecasting value-at-risk," Econometric Institute Research Papers EI 2008-34, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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  5. Massimiliano Caporin & Michael McAleer, 2010. "Do We Really Need Both BEKK and DCC? A Tale of Two Multivariate GARCH Models," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-713, CIRJE, Faculty of Economics, University of Tokyo.
  6. Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-652, CIRJE, Faculty of Economics, University of Tokyo.
  7. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 21(01), pages 232-261, February.
  8. Pérignon, Christophe & Deng, Zi Yin & Wang, Zhi Jun, 2008. "Do banks overstate their Value-at-Risk?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(5), pages 783-794, May.
  9. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 19(02), pages 280-310, April.
  10. 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, University of Canterbury, Department of Economics and Finance 11/05, University of Canterbury, Department of Economics and Finance.
  11. Massimiliano Caporin & Michael McAleer, 2010. "The Ten Commandments For Managing Investments," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 24(1), pages 196-200, 02.
  12. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  13. Ling, Shiqing & McAleer, Michael, 2002. "NECESSARY AND SUFFICIENT MOMENT CONDITIONS FOR THE GARCH(r,s) AND ASYMMETRIC POWER GARCH(r,s) MODELS," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 18(03), pages 722-729, June.
  14. McAleer, Michael & Jimenez-Martin, Juan-Angel & Perez-Amaral, Teodosio, 2013. "GFC-robust risk management strategies under the Basel Accord," International Review of Economics & Finance, Elsevier, Elsevier, vol. 27(C), pages 97-111.
  15. Shehzad, Choudhry Tanveer & De Haan, Jakob, 2013. "Was the 2007 crisis really a global banking crisis?," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 24(C), pages 113-124.
  16. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  17. Massimiliano Caporin & Michael McAleer, 2009. "Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-156, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  18. McAleer, Michael & Chan, Felix & Marinova, Dora, 2007. "An econometric analysis of asymmetric volatility: Theory and application to patents," Journal of Econometrics, Elsevier, Elsevier, vol. 139(2), pages 259-284, August.
  19. Shiqing Ling & Michael McAleer, 2001. "On Adaptive Estimation in Nonstationary ARMA Models with GARCH Errors," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0548, Institute of Social and Economic Research, Osaka University.
  20. Jeremy Berkowitz & James O'Brien, 2001. "How accurate are Value-at-Risk models at commercial banks?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-31, Board of Governors of the Federal Reserve System (U.S.).
  21. Roxana Chiriac & Winfried Pohlmeier, 2010. "How Risky Is the Value at Risk?," Working Paper Series, The Rimini Centre for Economic Analysis 07_10, The Rimini Centre for Economic Analysis.
  22. Michael McAleer & Les Oxley, 2005. "The Ten Commandments for Academics," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 19(5), pages 823-826, December.
  23. 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., John Wiley & Sons, Ltd., vol. 27(1), pages 1-19.
  24. Michael McAleer & Bernardo da Veiga, 2008. "Single-index and portfolio models for forecasting value-at-risk thresholds," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 27(3), pages 217-235.
  25. 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, Wiley Blackwell, vol. 23(5), pages 850-855, December.
  26. Shiqing Ling & Michael McAleer, 2001. "Stationarity and the Existence of Moments of a Family of GARCH Processes," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0535, Institute of Social and Economic Research, Osaka University.
  27. Li, W K & Ling, Shiqing & McAleer, Michael, 2002. " Recent Theoretical Results for Time Series Models with GARCH Errors," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(3), pages 245-69, July.
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Citations

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Cited by:
  1. Chia-Lin Chang & Juan-Ángel Jiménez-Martín & Esfandiar Maasoumi & Teodosio Pérez Amaral, 2014. "A Stochastic Dominance Approach to Financial Risk Management Strategies," Documentos de Trabajo del ICAE, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico 2014-08, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Apr 2014.
  2. Chia-Lin Chang & David Allen & Michael McAleer, 2013. "Recent Developments in Financial Economics and Econometrics: An Overview," Documentos de Trabajo del ICAE, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico 2013-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  3. Cathy W. S. Chen & Richard Gerlach & Bruce B. K. Hwang & Michael McAleer, 2011. "Forecasting Value-at-Risk Using Nonlinear Regression Quantiles and the Intra-day Range," Working Papers in Economics, University of Canterbury, Department of Economics and Finance 11/22, University of Canterbury, Department of Economics and Finance.
  4. Chia-Lin Chang & David Allen & Michael McAleer, 2013. "Recent Developments in Financial Economics and Econometrics: An Overview," Tinbergen Institute Discussion Papers 13-021/III, Tinbergen Institute.
  5. Chang, Chia-Lin, 2014. "Modelling a Latent Daily Tourism Financial Conditions Index," MPRA Paper 54887, University Library of Munich, Germany.

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