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Bank Capital and Value at Risk

Author

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  • Patricia Jackson
  • David Maude
  • William Perraudin

Abstract

To measure the risks involved in their trading operations, major banks are increasingly employing Value-at-Risk (VaR) models. In an important regulatory innovation, the Basle Committee has accepted that such models can be used in the determination of the capital that banks must hold to back their securities trading. This paper examines the empirical performance of different VaR models using data on the actual fixed income, foreign exchange and equity security holdings of a large bank. It also examines how a bank applying the models would have fared in the past if the proposed rules had been in operation.

Suggested Citation

  • Patricia Jackson & David Maude & William Perraudin, 1998. "Bank Capital and Value at Risk," Bank of England working papers 79, Bank of England.
  • Handle: RePEc:boe:boeewp:79
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1998/wp79.pdf
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    References listed on IDEAS

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    1. Paul H. Kupiec & James M. O'Brien, 1995. "Recent developments in bank capital regulation of market risks," Finance and Economics Discussion Series 95-51, Board of Governors of the Federal Reserve System (U.S.).
    2. 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.).
    3. 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.
    4. Dimson, Elroy & Marsh, Paul, 1995. " Capital Requirements for Securities Firms," Journal of Finance, American Finance Association, vol. 50(3), pages 821-851, July.
    5. 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.
    6. Arturo Estrella, 1995. "Taylor, Black and Scholes: series approximations and risk management pitfalls," Research Paper 9501, Federal Reserve Bank of New York.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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    Citations

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    Cited by:

    1. Cotter, John & Blake, David & Dowd, Kevin, 2006. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," MPRA Paper 3498, University Library of Munich, Germany.
    2. Arupratan Daripa & Simone Varotto, 1998. "Value at risk and precommitment: approaches to market risk regulation," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 137-143.
    3. Wai Yan Cheng & Michael Chak Sham Wong & Clement Yuk Pang Wong, 2003. "Market risk management of banks: implications from the accuracy of Value-at-Risk forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 22(1), pages 23-33.
    4. Broll, Udo & Wahl, Jack E., 2003. "Value at risk, bank equity and credit risk," Dresden Discussion Paper Series in Economics 04/03, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    5. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Ratings versus equity-based credit risk modelling: an empirical analysis," Bank of England working papers 132, Bank of England.
    6. Christian A.Johnson, 2001. "Value at risk: teoría y aplicaciones," Estudios de Economia, University of Chile, Department of Economics, vol. 28(2 Year 20), pages 217-247, December.
    7. Krainer, Robert E., 2002. "Banking in a theory of the business cycle: a model and critique of the Basle Accord on risk-based capital requirements for banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 413-433, May.
    8. Torben G. Andersen & Tim Bollerslev & Peter Christoffersen & Francis X. Diebold, 2007. "Practical Volatility and Correlation Modeling for Financial Market Risk Management," NBER Chapters,in: The Risks of Financial Institutions, pages 513-548 National Bureau of Economic Research, Inc.
    9. Flavio Bazzana, 2001. "I modelli interni per la valutazione del rischio di mercato secondo l'approccio del Value at Risk," Alea Tech Reports 011, Department of Computer and Management Sciences, University of Trento, Italy, revised 14 Jun 2008.
    10. Arupratan Daripa & Simone Varotto, 1997. "Agency Incentives and Reputational Distortions: a Comparison of the Effectiveness of Value-at-Risk and Pre-commitment in Regulating Market Risk," Bank of England working papers 69, Bank of England.
    11. Mark R. Manfredo. & Raymond M. Leuthold, 1999. "Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk," Finance 9908002, University Library of Munich, Germany.
    12. Mark R. Manfredo & Raymond M. Leuthold, 1998. "Agricultural Applications of Value-at-Risk Analysis: A Perspective," Finance 9805002, University Library of Munich, Germany.
    13. Gonzalo Cortazar & Alejandro Bernales & Diether Beuermann, 2005. "Methodology and Implementation of Value-at-Risk Measures in Emerging Fixed-Income Markets with Infrequent Trading," Finance 0512030, University Library of Munich, Germany.
    14. Longin, François, 1999. "From Value at Risk to Stress Testing: The Extreme Value Approach," CEPR Discussion Papers 2161, C.E.P.R. Discussion Papers.

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