What Happened to Risk Management During the 2008-09 Financial Crisis?

Michael McAleer, Juan Jimenez-Martin and Teodosio Pérez-Amaral

No EI 2009-17, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor’s 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits.

Keywords: aggressive risk strategy; conservative risk strategy; risk management; value-at-risk forecast; violations (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G17 G32 (search for similar items in EconPapers)
Date: 2009-08-18
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Related works:
Working Paper: What Happened to Risk Management During the 2008-09 Financial Crisis? (2009)
Working Paper: What Happened to Risk Management During the 2008-09 Financial Crisis? (2009)
Working Paper: What Happened to Risk Management During the 2008-09 Financial Crisis? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureir:16512

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