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What Happened to Risk Management During the 2008-09 Financial Crisis?

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Author Info
Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo)
Juan-Angel Jimenez-Martin (Department of Quantitative Economics, Complutense University of Madrid)
Teodosio Perez-Amaral (Department of Quantitative Economics, Complutense University of Madrid)

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Abstract

When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor's 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits.

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Publisher Info
Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-636.

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Length: 19 pages
Date of creation: Aug 2009
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Handle: RePEc:tky:fseres:2009cf636

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  1. 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. [Downloadable!]
  2. 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. [Downloadable!]
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  3. Michael McAleer & Les Oxley, 2005. "The Ten Commandments for Academics," Journal of Economic Surveys, Blackwell Publishing, vol. 19(5), pages 823-826, December. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
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This page was last updated on 2009-11-27.

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