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The value of Value-at-Risk: A theoretical approach to the pricing and performance of risk measurement systems

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  • Wiener, Zvi

Abstract

Risk-based capital adequacy requirements are the main tool employed by government regulators to assure bank stability. This approach allows banks to choose from a number of alternative methods for calculating the required capital. Many systems for measuring risk differ significantly in cost, precision, and in the potential “capital savings”. We develop a statistical model for evaluating risk measurement systems and optimizing the selection process. The model is based on queuing theory. The selection of the optimal system is a function of available capital, the volume and the character of bank activity. While the most precise system may lower a bank's minimal capital reserve requirements, it is not necessarily the optimal system once total costs are evaluated.

Suggested Citation

  • Wiener, Zvi, 2012. "The value of Value-at-Risk: A theoretical approach to the pricing and performance of risk measurement systems," Journal of Economics and Business, Elsevier, vol. 64(3), pages 199-213.
    • Handle: RePEc:eee:jebusi:v:64:y:2012:i:3:p:199-213
    DOI: 10.1016/j.jeconbus.2012.02.002
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    References listed on IDEAS

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    1. Robert B. Litterman & Tim Shepheard-Walwyn, 1998. "Building a coherent risk measurement and capital optimisation model for financial firms," Economic Policy Review, Federal Reserve Bank of New York, vol. 4(Oct), pages 171-182.
    2. Philippe Artzner, 1999. "Application of Coherent Risk Measures to Capital Requirements in Insurance," North American Actuarial Journal, Taylor & Francis Journals, vol. 3(2), pages 11-25.
    3. Vlaar, Peter J. G., 2000. "Value at risk models for Dutch bond portfolios," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1131-1154, July.
    4. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
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    More about this item

    Keywords

    Basel accord; Capital adequacy; Risk measurement; Value-at-Risk (VaR); Queuing theory; Erlang formula; Financial institution regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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