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Optimal Risk Management Before, During and After the 2008-09 Financial Crisis

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  • McAleer, Michael
  • Jimenez-Martin, Juan-Angel
  • Perez Amaral, Teodosio

Abstract

In this paper we advance the idea that optimal risk management under the Basel II Accord will typically require the use of a combination of different models of risk. This idea is illustrated by analyzing the best empirical models of risk for five stock indexes before, during, and after the 2008-09 financial crisis. The data used are the Dow Jones Industrial Average, Financial Times Stock Exchange 100, Nikkei, Hang Seng and Standard and Poor’s 500 Composite Index. The primary goal of the exercise is to identify the best models for risk management in each period according to the minimization of average daily capital requirements under the Basel II Accord. It is found that the best risk models can and do vary before, during and after the 2008-09 financial crisis. Moreover, it is found that an aggressive risk management strategy, namely the supremum strategy that combines different models of risk, can result in significant gains in average daily capital requirements, relative to the strategy of using single models, while staying within the limits of the Basel II Accord.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20975.

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Date of creation: 19 Sep 2009
Date of revision: 20 Sep 2009
Publication status: Forthcoming in Medium for Econometric Application 1.18(2010): pp. 20-28
Handle: RePEc:pra:mprapa:20975

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Keywords: Optimal risk management; average daily capital requirements; alternative risk strategies; value-at-risk forecasts; combining risk models;

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References

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  1. Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," Documentos del Instituto Complutense de Análisis Económico 0910, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. 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.
  3. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  4. 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.
  5. 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.
  6. Massimiliano Caporin & Michael McAleer, 2010. "The Ten Commandments For Managing Investments," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 196-200, 02.
  7. 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.
  8. 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.
  9. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, vol. 21(01), pages 232-261, February.
  10. Manabu Asai & Michael McAleer & Jun Yu, 2006. "Multivariate Stochastic Volatility: A Review," Econometric Reviews, Taylor & Francis Journals, vol. 25(2-3), pages 145-175.
  11. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
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Cited by:
  1. Chia-Lin Chang & Michael McAleer, 2011. "Aggregation, Heterogeneous Autoregression and Volatility of Daily International Tourist Arrivals and Exchange Rates," Documentos del Instituto Complutense de Análisis Económico 2011-13, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. Chia-Lin Chang & Michael McAleer, 2009. "Daily Tourist Arrivals, Exchange Rates and Volatility for Korea and Taiwan," CIRJE F-Series CIRJE-F-691, CIRJE, Faculty of Economics, University of Tokyo.

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