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

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  • Juan-Angel Jimenez-Martin

    ()
    (Universidad Complutense de Madrid, Dpto. de Fundamentos de Análisis Económico II)

  • Michael McAleer

    (Universidad Complutense de Madrid, Dpto. de Fundamentos de Análisis Económico II)

  • Teodosio Pérez-Amaral

    (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense)

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 Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 0912.

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Length: 18 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ucm:doicae:0912

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Related research

Keywords: Financial portfolios; daily capital charges; frequency of violations; magnitude of violations; optimizing strategy; risk forecasts; value-at-risk; green zone; red zone.;

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References

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  1. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, vol. 21(01), pages 232-261, February.
  2. 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, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  3. Juan-Ángel Jiménez-Martín & Michael McAleer & Teodosio Pérez-Amaral, 2009. "A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk," Documentos de Trabajo del ICAE 0907, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  4. Massimiliano Caporin & Michael McAleer, 2010. "The Ten Commandments For Managing Investments," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 196-200, 02.
  5. Manabu Asai & Michael McAleer & Jun Yu, 2006. "Multivariate Stochastic Volatility: A Review," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 25(2-3), pages 145-175.
  6. McAleer, M.J., 2008. "The ten commandments for optimizing value-at-risk and daily capital charges," Econometric Institute Research Papers EI 2008-32, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  7. Massimiliano Caporin & Michael McAleer, 2009. "Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models," CIRJE F-Series CIRJE-F-638, CIRJE, Faculty of Economics, University of Tokyo.
  8. Michael McAleer & Les Oxley, 2005. "The Ten Commandments for Academics," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 823-826, December.
  9. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
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Cited by:
  1. Chia-Lin Chang & Michael McAleer, 2010. "Aggregation, Heterogeneous Autoregression and Volatility of Daily International Tourist Arrivals and Exchange Rates," Working Papers in Economics 10/02, University of Canterbury, Department of Economics and Finance.
  2. Chia-Lin Chang & Michael McAleer, 2009. "Daily Tourist Arrivals, Exchange Rates and Volatility for Korea and Taiwan," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-192, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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