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Backtesting trading risk of commercial banks using expected shortfall

  • Wong, Woon K.

This paper uses saddlepoint technique to backtest the trading risk of commercial banks using expected shortfall. It is found that four out of six US commercial banks have excessive trading risks. Monte Carlo simulation studies show that the proposed backtest is very accurate and powerful even for small test samples. More importantly, risk managers can carry out the proposed backtest based on any number of exceptions, so that incorrect risk models can be promptly detected before any further huge losses are realized.

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File URL: http://www.sciencedirect.com/science/article/B6VCY-4R98K5S-1/1/56c26580fb2db30e854012426c5e8281
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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 7 (July)
Pages: 1404-1415

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:7:p:1404-1415
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
  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, vol. 49(197), pages 271-277.
  3. Eberlein, Ernst & Keller, Ulrich & Prause, Karsten, 1998. "New Insights into Smile, Mispricing, and Value at Risk: The Hyperbolic Model," The Journal of Business, University of Chicago Press, vol. 71(3), pages 371-405, July.
  4. Yamai, Yasuhiro & Yoshiba, Toshinao, 2005. "Value-at-risk versus expected shortfall: A practical perspective," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 997-1015, April.
  5. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
  6. Kerkhof, F.L.J. & Melenberg, B., 2002. "Backtesting for Risk-Based Regulatory Capital," Discussion Paper 2002-110, Tilburg University, Center for Economic Research.
  7. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
  8. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  9. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-74, October.
  10. Szego, Giorgio, 2002. "Measures of risk," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1253-1272, July.
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