The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges
AbstractCredit risk is the most important type of risk in terms of monetary value. Another key risk measure is market risk, which is concerned with stocks and bonds, and related financial derivatives, as well as exchange rates and interest rates. This paper is concerned with market risk management and monitoring under the Basel II Accord, and presents Ten Commandments for optimizing Value-at-Risk (VaR) and daily capital charges, based on choosing wisely from: (1) conditional, stochastic and realized volatility; (2) symmetry, asymmetry and leverage; (3) dynamic correlations and dynamic covariances; (4) single index and portfolio models; (5) parametric, semiparametric and nonparametric models; (6) estimation, simulation and calibration of parameters; (7) assumptions, regularity conditions and statistical properties; (8) accuracy in calculating moments and forecasts; (9) optimizing threshold violations and economic benefits; and (10) optimizing private and public benefits of risk management. For practical purposes, it is found that the Basel II Accord would seem to encourage excessive risk taking at the expense of providing accurate measures and forecasts of risk and VaR.
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Bibliographic InfoPaper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0910.
Length: 39 pages
Date of creation: 2009
Date of revision:
Daily capital charges; Excessive risk taking Market risk; Risk management; Value-at-risk; Violations.;
Other versions of this item:
- Michael McAleer, 2009. "The Ten Commandments For Optimizing Value-At-Risk And Daily Capital Charges," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 831-849, December.
- Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," CIRJE F-Series CIRJE-F-652, CIRJE, Faculty of Economics, University of Tokyo.
- McAleer, M.J., 2008. "The ten commandments for optimizing value-at-risk and daily capital charges," Econometric Institute Report EI 2008-32, Erasmus University Rotterdam, Econometric Institute.
- Michael McAleer, 2009. "The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges," CARF F-Series CARF-F-164, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- NEP-ALL-2009-03-22 (All new papers)
- NEP-FMK-2009-03-22 (Financial Markets)
- NEP-RMG-2009-03-22 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McAleer, Michael & Medeiros, Marcelo C., 2008.
"A multiple regime smooth transition Heterogeneous Autoregressive model for long memory and asymmetries,"
Journal of Econometrics,
Elsevier, vol. 147(1), pages 104-119, November.
- Michael McAller & Marcelo C. Medeiros, 2007. "A multiple regime smooth transition heterogeneous autoregressive model for long memory and asymmetries," Textos para discussÃ£o 544, Department of Economics PUC-Rio (Brazil).
- McAleer, Michael & Chan, Felix & Hoti, Suhejla & Lieberman, Offer, 2008. "Generalized Autoregressive Conditional Correlation," Econometric Theory, Cambridge University Press, vol. 24(06), pages 1554-1583, December.
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