A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk

Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions (ADIs) have to communicate their daily risk estimates to the monetary authorities at the beginning of the trading day, using a variety of Value-at-Risk (VaR) models to measure risk. Sometimes the risk estimates communi...

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Detalles Bibliográficos
Autores: McAleer, Michael, Jiménez Martín, Juan Ángel, Pérez Amaral, Teodosio
Tipo de recurso: informe técnico
Fecha de publicación:2009
País:España
Institución:Universidad Complutense de Madrid (UCM)
Repositorio:Docta Complutense
Idioma:inglés
OAI Identifier:oai:docta.ucm.es:20.500.14352/49253
Acceso en línea:https://hdl.handle.net/20.500.14352/49253
Access Level:acceso abierto
Palabra clave:G32
G11
G17
C53
Daily capital charges
Endogenous violations
Frequency of violations
Optimizing strategy
Risk forecasts
Value-at-risk.
Finanzas
Estadística matemática (Estadística)
1209 Estadística
Descripción
Sumario:Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions (ADIs) have to communicate their daily risk estimates to the monetary authorities at the beginning of the trading day, using a variety of Value-at-Risk (VaR) models to measure risk. Sometimes the risk estimates communicated using these models are too high, thereby leading to large capital requirements and high capital costs. At other times, the risk estimates are too low, leading to excessive violations, so that realised losses are above the estimated risk. In this paper we propose a learning strategy that complements existing methods for calculating VaR and lowers daily capital requirements, while restricting the number of endogenous violations within the Basel II Accord penalty limits. We suggest a decision rule that responds to violations in a discrete and instantaneous manner, while adapting more slowly in periods of no violations. We apply the proposed strategy to Standard & Poor’s 500 Index and show there can be substantial savings in daily capital charges, while restricting the number of violations to within the Basel II penalty limits.