Lambda Value at Risk and Regulatory Capital: A Dynamic Approach to Tail Risk

Asmerilda Hitaj, Cesario Mateus and Ilaria Peri
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Asmerilda Hitaj: Department of Statistics and Quantitative Methods, University of Milan Bicocca, U7, Via Bicocca degli Arcimboldi 8, Milan 20126, Italy
Ilaria Peri: Department of Economics, Mathematics and Statistics, Birkbeck University of London, Malet St, Bloomsbury, London WC1E 7HX, UK

Risks, 2018, vol. 6, issue 1, 1-18

Abstract: This paper presents the first methodological proposal of estimation of the ? V a R . Our approach is dynamic and calibrated to market extreme scenarios, incorporating the need of regulators and financial institutions in more sensitive risk measures. We also propose a simple backtesting methodology by extending the V a R hypothesis-testing framework. Hence, we test our ? V a R proposals under extreme downward scenarios of the financial crisis and different assumptions on the profit and loss distribution. The findings show that our ? V a R estimations are able to capture the tail risk and react to market fluctuations significantly faster than the V a R and expected shortfall. The backtesting exercise displays a higher level of accuracy for our ? V a R estimations.

Keywords: banking regulation; financial risk management; risk modelling; value at risk (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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