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Value at Risk: Implementing a Risk Measurement Standard

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Author Info
Christopher Marshall
Michael Siegel
Abstract

In the wake of recent failures of risk management, there has been a widespread call for improved quantification of the financial risks facing firms. At the forefront of this clamor has been Value at Risk. Previous research has identified differences in models, or Model Risk, as an important impediment to developing a Value at Risk standard. By contrast, this paper considers the divergence in a model's implementation in software and how it too, affects the establishment of a risk measurement standard. Different leading risk management systems' vendors were given identical portfolios of instruments of varying complexity, and were asked to assess the value at risk according to one common model, J.P. Morgan's RiskMetrics™. We analyzed the VaR results on a case by case basis, and in terms of prior expectations from the structure of financial instruments in the portfolio, as well as prior vendor expectations about the relative complexity of different asset classes. It follows that this research indicates the extent to which one particular model of risk can be effectively specified in advance, independent of the model's detailed implementation and use in practice.

Key words: Risk Management, Financial Services, Model Management.

This paper was presented at the Financial Institutions Center's October 1996 conference on "

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 96-47.

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Date of creation: Jun 1996
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Handle: RePEc:wop:pennin:96-47

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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.:
  1. Hughes, Joseph P, et al, 1996. "Efficient Banking under Interstate Branching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 1045-71, November. [Downloadable!] (restricted)
  2. Allen N. Berger & Loretta J. Mester, 1997. "Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?," Center for Financial Institutions Working Papers 97-04, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  3. Joseph P. Hughes & William W. Lang & Loretta J. Mester, 1995. "Recovering technologies that account for generalized managerial preferences: an application to non-risk neutral banks," Working Papers 95-8/R, Federal Reserve Bank of Philadelphia.
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  4. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14. [Downloadable!]
  5. Joseph P. Hughes & Loretta J. Mester & Moon Choo-Geol, 2000. "Are scale economies in banking elusive or illusive? evidence obtained by incorporating capital structure and risk-taking into models of bank production," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 233-264.
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  6. Joseph Hughes, 1999. "Incorporating risk into the analysis of production," Atlantic Economic Journal, International Atlantic Economic Society, vol. 27(1), pages 1-23, March. [Downloadable!] (restricted)
  7. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December. [Downloadable!] (restricted)
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  10. Saunders, Anthony & Strock, Elizabeth & Travlos, Nickolaos G, 1990. " Ownership Structure, Deregulation, and Bank Risk Taking," Journal of Finance, American Finance Association, vol. 45(2), pages 643-54, June. [Downloadable!] (restricted)
  11. Humphrey, David B & Pulley, Lawrence B, 1997. "Banks' Responses to Deregulation: Profits, Technology, and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 73-93, February.
  12. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon, 1996. "Efficient banking under interstate branching," Working Papers 96-9, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  13. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June. [Downloadable!] (restricted)
  14. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol, 1999. "The dollars and sense of bank consolidation," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 291-324, February. [Downloadable!] (restricted)
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  15. Joseph P. Hughes & Loretta J. Mester, . "A Quality and Risk-Adjusted Cost Function for Banks: Evidence on the "Too-Big-To-Fail" Doctrine," Rodney L. White Center for Financial Research Working Papers 25-92, Wharton School Rodney L. White Center for Financial Research.
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  16. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September. [Downloadable!] (restricted)
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  1. Matthew Pritsker, 1997. "Evaluating Value at Risk Methodologies: Accuracy versus Computational Time," Journal of Financial Services Research, Springer, vol. 12(2), pages 201-242, October. [Downloadable!] (restricted)
  2. Anthony Santomero, 1997. "Commercial Bank Risk Management: An Analysis of the Process," Journal of Financial Services Research, Springer, vol. 12(2), pages 83-115, October. [Downloadable!] (restricted)
  3. Matthew Pritsker, 1996. "Evaluating Value-at-Risk Methodologies: Accuracy versus Computational Time," Center for Financial Institutions Working Papers 96-48, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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