IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Methods for evaluating value-at-risk estimates

  • Jose A. Lopez

Since 1998, U.S. commercial banks with significant trading activities have been required to hold capital against their defined market risk exposure. Under the "internal models" approach embodied in the current regulatory guidelines, the capital charges are a function of banks' own value-at-risk (VaR) estimates. VaR estimates are simply forecasts of the maximum portfolio loss that could occur over a given holding period with a specified confidence level. Clearly, the accuracy of these VaR estimates is of concern to both banks and their regulators. ; To date, two hypothesis-testing methods for evaluating VaR estimates have been proposed, namely, the binomial and the interval forecast methods. For these tests, the null hypothesis is that the VaR estimates in question exhibit a specified property that is characteristic of accurate VaR estimates. As shown in a simulation exercise, these tests generally have low power and are thus prone to misclassifying inaccurate VaR estimates as "acceptably accurate." ; An alternative evaluation method, based on regulatory loss functions, is proposed. Magnitude loss functions that assign quadratic numerical scores when observed portfolio losses exceed VaR estimates are shown to be particularly useful. Simulation results indicate that the loss function evaluation method is capable of distinguishing between VaR estimates generated by accurate and alternative VaR models. The additional information provided by this method as well as its flexibility with respect to the specification of the loss function make a reasonable case for its use in the regulatory evaluation of VaR estimates.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.frbsf.org/econrsrch/econrev/99-2/3-17.pdf
Download Restriction: no

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1999)
Issue (Month): ()
Pages: 3-17

as
in new window

Handle: RePEc:fip:fedfer:y:1999:p:3-17:n:2
Contact details of provider: Postal: P.O. Box 7702, San Francisco, CA 94120-7702
Phone: (415) 974-2000
Fax: (415) 974-3333
Web page: http://www.frbsf.org/
Email:


More information through EDIRC

Order Information: Email:


References listed on IDEAS
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.:

as in new window
  1. Francis X. Diebold & Todd A. Gunther & Anthony S. Tay, 1997. "Evaluating Density Forecasts," Center for Financial Institutions Working Papers 97-37, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Jose A. Lopez, 1997. "Regulatory evaluation of value-at-risk models," Research Paper 9710, Federal Reserve Bank of New York.
  3. Jose Lopez, 1998. "Methods for evaluating value-at-risk estimates," Research Paper 9802, Federal Reserve Bank of New York.
  4. Jeremy Berkowitz, 1999. "Evaluating the forecasts of risk models," Finance and Economics Discussion Series 1999-11, Board of Governors of the Federal Reserve System (U.S.).
  5. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  6. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
  7. Francis X. Diebold & Jose A. Lopez, 1995. "Forecast evaluation and combination," Research Paper 9525, Federal Reserve Bank of New York.
  8. Paul H. Kupiec & James M. O'Brien, 1995. "A pre-commitment approach to capital requirements for market risk," Finance and Economics Discussion Series 95-36, Board of Governors of the Federal Reserve System (U.S.).
  9. Darryll Hendricks & Beverly Hirtle, 1997. "Bank capital requirements for market risk: the internal models approach," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-12.
  10. 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.
  11. Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
  12. Granger, C.W.J. & Pesaran, H., 1996. "A Decision_Theoretic Approach to Forecast Evaluation," Cambridge Working Papers in Economics 9618, Faculty of Economics, University of Cambridge.
  13. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69.
  14. 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.
  15. 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.).
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedfer:y:1999:p:3-17:n:2. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.