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A Note on Estimating Market–based Minimum Capital Risk Requirements: A Multivariate GARCH Approach

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  • C. Brooks
  • A. D. Clare
  • G. Persand

Abstract

Internal risk management models of the kind popularized by J. P. Morgan are now used widely by the world’s most sophisticated financial institutions as a means of measuring risk. Using the returns on three of the most popular futures contracts on the London International Financial Futures Exchange, in this paper we investigate the possibility of using multivariate generalized autoregressive conditional heteroscedasticity (GARCH) models for the calculation of minimum capital risk requirements (MCRRs). We propose a method for the estimation of the value at risk of a portfolio based on a multivariate GARCH model. We find that the consideration of the correlation between the contracts can lead to more accurate, and therefore more appropriate, MCRRs compared with the values obtained from a univariate approach to the problem.

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  • C. Brooks & A. D. Clare & G. Persand, 2002. "A Note on Estimating Market–based Minimum Capital Risk Requirements: A Multivariate GARCH Approach," Manchester School, University of Manchester, vol. 70(5), pages 666-681, September.
    • Handle: RePEc:bla:manchs:v:70:y:2002:i:5:p:666-681
    DOI: 10.1111/1467-9957.00319
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    Cited by:

    1. Cotter, John, 2004. "Absolute Return Volatility," MPRA Paper 3529, University Library of Munich, Germany, revised 2005.
    2. Par Sjolander, 2009. "Are the Basel II requirements justified in the presence of structural breaks?," Applied Financial Economics, Taylor & Francis Journals, vol. 19(12), pages 985-998.

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