Market risk management of banks: implications from the accuracy of Value-at-Risk forecasts
This paper adopts the backtesting criteria of the Basle Committee to compare the performance of a number of simple Value-at-Risk (VaR) models. These criteria provide a new standard on forecasting accuracy. Currently central banks in major money centres, under the auspices of the Basle Committee of the Bank of International settlement, adopt the VaR system to evaluate the market risk of their supervised banks. Banks are required to report VaRs to bank regulators with their internal models. These models must comply with Basle's backtesting criteria. If a bank fails the VaR backtesting, higher capital requirements will be imposed. VaR is a function of volatility forecasts. Past studies mostly conclude that ARCH and GARCH models provide better volatility forecasts. However, this paper finds that ARCH- and GARCH-based VaR models consistently fail to meet Basle's backtesting criteria. These findings suggest that the use of ARCH- and GARCH-based models to forecast their VaRs is not a reliable way to manage a bank's market risk. Copyright © 2002 John Wiley & Sons, Ltd.
Volume (Year): 22 (2003)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966|
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.:
- 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.
- West, K.D. & Cho, D., 1993.
"The Predictive Ability of Several Models of Exchange Rate Volatility,"
9317r, Wisconsin Madison - Social Systems.
- West, Kenneth D. & Cho, Dongchul, 1995. "The predictive ability of several models of exchange rate volatility," Journal of Econometrics, Elsevier, vol. 69(2), pages 367-391, October.
- Kenneth D. West & Dongchul Cho, 1994. "The Predictive Ability of Several Models of Exchange Rate Volatility," NBER Technical Working Papers 0152, National Bureau of Economic Research, Inc.
- West, K.D. & Cho, D., 1993. "The Predictive Ability of Several Models of Exchange Rate Volatility," Working papers 9317, Wisconsin Madison - Social Systems.
- Patricia Jackson & David Maude & William Perraudin, 1998. "Bank Capital and Value at Risk," Bank of England working papers 79, Bank of England.
- 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.
- Baillie, R.T. & Bollerslev, R.T., 1990.
"Prediction In Dynamic Models With Time Dependent Conditional Variances,"
8815, Michigan State - Econometrics and Economic Theory.
- Baillie, Richard T. & Bollerslev, Tim, 1992. "Prediction in dynamic models with time-dependent conditional variances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 91-113.
- 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.
- Jose A. Lopez, 1999.
"Methods for evaluating value-at-risk estimates,"
Federal Reserve Bank of San Francisco, pages 3-17.
- 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.).
- 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.
When requesting a correction, please mention this item's handle: RePEc:jof:jforec:v:22:y:2003:i:1:p:23-33. 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: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.