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Basel Accord

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Michael Mcaleer – One of the best experts on this subject based on the ideXlab platform.

  • It pays to Violate: Model Choice and Critical Value Assumption for Forecasting Value-at-Risk Thresholds
    , 2020
    Co-Authors: Bernardo Da Veiga, Felix Chan, Michael Mcaleer

    Abstract:

    The internals models amendment to the Basel Accord allows banks to use internal models to forecast Value-at-Risk (VaR) thresholds which are used to calculate the required capital banks must hold in reserves as a protection against negative changes in the value of their trading portfolios. As capital reserves lead to an opportunity cost to banks it is likely that banks could be temped to use models that underpredict risk and hence lead to low capital charges. In order to avoid this problem the Basel Accord introduced backtesting procedure whereby banks using models that led to excessive violations would be penalised through higher capital chares. This paper investigates the performance of five popular volatility models that can be used to forecast VaR thresholds under a variety of distributional assumptions. The results suggest that within the current constraints and penalty structure set out in the Basel Accord the lowest capital charges arise when using models that lead to excessive violations, suggesting the current penalty structure is not severe enough.

  • has the Basel Accord improved risk management during the global financial crisis
    The North American Journal of Economics and Finance, 2013
    Co-Authors: Michael Mcaleer, Juanangel Jimenezmartin, Teodosio Perezamaral

    Abstract:

    The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008–09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index.

  • original article gfc robust risk management under the Basel Accord using extreme value methodologies
    Mathematics and Computers in Simulation, 2013
    Co-Authors: Juanangel Jimenezmartin, Michael Mcaleer, Teodosio Perezamaral, Paulo Araujo Santos

    Abstract:

    In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. The median is not affected by extremes, unlike the mean. In periods of contagion, wherein the number and values of extremes are substantially greater, the use of the median would be expected to be even more robust than the mean. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-2009 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

Teodosio Perezamaral – One of the best experts on this subject based on the ideXlab platform.

  • has the Basel Accord improved risk management during the global financial crisis
    The North American Journal of Economics and Finance, 2013
    Co-Authors: Michael Mcaleer, Juanangel Jimenezmartin, Teodosio Perezamaral

    Abstract:

    The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008–09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index.

  • original article gfc robust risk management under the Basel Accord using extreme value methodologies
    Mathematics and Computers in Simulation, 2013
    Co-Authors: Juanangel Jimenezmartin, Michael Mcaleer, Teodosio Perezamaral, Paulo Araujo Santos

    Abstract:

    In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. The median is not affected by extremes, unlike the mean. In periods of contagion, wherein the number and values of extremes are substantially greater, the use of the median would be expected to be even more robust than the mean. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-2009 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

  • gfc robust risk management strategies under the Basel Accord
    International Review of Economics & Finance, 2013
    Co-Authors: Michael Mcaleer, Juanangel Jimenezmartin, Teodosio Perezamaral

    Abstract:

    A risk management strategy is proposed as being robust to the Global Financial Crisis (GFC) by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. This risk management strategy is GFC-robust in the sense that maintaining the same risk management strategies before, during and after a financial crisis would lead to comparatively low daily capital charges and violation penalties. The new method is illustrated by using the S&P500 index before, during and after the 2008–09 global financial crisis. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria. The median VaR risk management strategy is GFC-robust as it provides stable results across different periods relative to other VaR forecasting models. The new strategy based on combined forecasts of single models is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

Juanangel Jimenezmartin – One of the best experts on this subject based on the ideXlab platform.

  • has the Basel Accord improved risk management during the global financial crisis
    The North American Journal of Economics and Finance, 2013
    Co-Authors: Michael Mcaleer, Juanangel Jimenezmartin, Teodosio Perezamaral

    Abstract:

    The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008–09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index.

  • original article gfc robust risk management under the Basel Accord using extreme value methodologies
    Mathematics and Computers in Simulation, 2013
    Co-Authors: Juanangel Jimenezmartin, Michael Mcaleer, Teodosio Perezamaral, Paulo Araujo Santos

    Abstract:

    In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. The median is not affected by extremes, unlike the mean. In periods of contagion, wherein the number and values of extremes are substantially greater, the use of the median would be expected to be even more robust than the mean. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-2009 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

  • gfc robust risk management strategies under the Basel Accord
    International Review of Economics & Finance, 2013
    Co-Authors: Michael Mcaleer, Juanangel Jimenezmartin, Teodosio Perezamaral

    Abstract:

    A risk management strategy is proposed as being robust to the Global Financial Crisis (GFC) by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. This risk management strategy is GFC-robust in the sense that maintaining the same risk management strategies before, during and after a financial crisis would lead to comparatively low daily capital charges and violation penalties. The new method is illustrated by using the S&P500 index before, during and after the 2008–09 global financial crisis. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria. The median VaR risk management strategy is GFC-robust as it provides stable results across different periods relative to other VaR forecasting models. The new strategy based on combined forecasts of single models is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.