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

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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 Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 2012-26.

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Length: 33 pages
Date of creation: 2012
Date of revision: Oct 2012
Handle: RePEc:ucm:doicae:1226

Note: For financial support, the first author wishes to thank the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science. The second and third authors acknowledge the financial support of the Ministerio de Ciencia y Tecnología and Comunidad de Madrid, Spain.
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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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  1. 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.
  2. Michael McAleer & Juan‐Ángel Jiménez‐Martín & Teodosio Pérez‐Amaral, 2013. "International Evidence on GFC‐Robust Forecasts for Risk Management under the Basel Accord," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(3), pages 267-288, 04.
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Citations

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Cited by:
  1. Chia-Lin Chang & David Allen & Michael McAleer, 2013. "Recent Developments in Financial Economics and Econometrics: An Overview," Documentos del Instituto Complutense de Análisis Económico 2013-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. 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.
  3. Chang, Chia-Lin, 2014. "Modelling a Latent Daily Tourism Financial Conditions Index," MPRA Paper 54887, University Library of Munich, Germany.

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