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Value at risk: a critical overview


  • Robert Sollis


Purpose - A misplaced reliance on value at risk (VaR) has been focused on in the media as one of the main reasons for the current financial crisis, and the recently published Design/methodology/approach - Simple numerical examples utilising real and simulated data are employed to reinforce the main arguments. Findings - This paper explains that some of the main approaches employed by banks for computing VaR have serious weaknesses. These weaknesses have contributed to the current financial crisis. Research limitations/implications - Consistent with the introductory nature of this paper, the empirical research is limited to simple examples. Practical implications - The evidence here suggest that if VaR is to play a major role under future financial regulation then research is required to develop improved estimation techniques and backtesting procedures. Originality/value - This paper differs from many academic papers on VaR by assuming only a very basic knowledge of mathematics and statistics.

Suggested Citation

  • Robert Sollis, 2009. "Value at risk: a critical overview," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 17(4), pages 398-414, November.
  • Handle: RePEc:eme:jfrcpp:v:17:y:2009:i:4:p:398-414

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    References listed on IDEAS

    1. Robert A. Eisenbeis & Larry D. Wall, 2002. "The major supervisory initiatives post-FDICIA: Are they based on the goals of PCA? Should they be?," FRB Atlanta Working Paper 2002-31, Federal Reserve Bank of Atlanta.
    2. Larry Wall & Maria Nieto, 2006. "Precondition for a Successful Implementation of Supervisors' Primpt Corrective Action: Is There a Case for a Banking Standard in the EU?," FMG Special Papers sp165, Financial Markets Group.
    3. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, March.
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    5. Mayes, David G. & Nieto, María J. & Wall, Larry, 2008. "Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?," Journal of Financial Stability, Elsevier, vol. 4(3), pages 232-257, September.
    6. María Nieto & Garry J. Schinasi, 2007. "EU Framework for Safeguarding Financial Stability; Towards an Analytical Benchmark for Assessing its Effectiveness," IMF Working Papers 07/260, International Monetary Fund.
    7. George G. Kaufman, 2004. "Depositor Liquidity and Loss Sharing in Bank Failure Resolutions," Contemporary Economic Policy, Western Economic Association International, vol. 22(2), pages 237-249, April.
    8. Gillian G. H. Garcia & Maria J. Nieto, 2007. "Preserving Financial Stability: A Dilemma For The European Union," Contemporary Economic Policy, Western Economic Association International, vol. 25(3), pages 444-458, July.
    9. Eva H. G. Hüpkes, 2005. ""Too Big to Save" — Toward a Functional Approach to Resolving Crises in Global Financial Institutions," World Scientific Book Chapters,in: Systemic Financial Crises Resolving Large Bank Insolvencies, chapter 14, pages 193-215 World Scientific Publishing Co. Pte. Ltd..
    10. Lastra, Rosa Maria, 2006. "Legal Foundations of International Monetary Stability," OUP Catalogue, Oxford University Press, number 9780199269341, June.
    11. International Monetary Fund, 2008. "Cross-Border Coordination of Prudential Supervision and Deposit Guarantees," IMF Working Papers 08/283, International Monetary Fund.
    12. George G. Kaufman, 2004. "FDIC losses in bank failures: has FDICIA made a difference?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 13-25.
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    Cited by:

    1. Bogdan ZUGRAVU & Dumitru Cristian OANEA & Victoria Gabriela ANGHELACHE, 2013. "Analysis Based on the Risk Metrics Model," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 61(2), pages 145-154, May.
    2. Constantin Anghelache & Bodo Gyorgy, 2016. "Theoretical aspects regarding systemic risk and managerial decisions during the crisis," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 64(12), pages 110-116, December.
    3. Dumitru-Cristian OANEA & Gabriela-Victoria ANGHELACHE, 2014. "Systemic Risk Caused By Romanian Financial Intermediaries During Financial Crisis: A Covar Approach," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 14, pages 171-178, December.
    4. repec:rsr:supplm:v:65:y:2017:i:6:p:102-111 is not listed on IDEAS
    5. Dumitru Cristian OANEA & Victoria Gabriela ANGHELACHE & Bogdan ZUGRAVU, 2013. "Econometric Model for Risk Forecasting," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 61(2), pages 123-127, May.
    6. Gabriela Anghelache & Dumitru-Cristian Oanea, 2014. "Main Romanian Commercial Banks’ Systemic Risk during Financial Crisis: a CoVar Approach," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 6(2), pages 069-080, December.

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    Risk management; Regulation; Value analysis;


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