Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis?

Michael McAleer, Juan-à ngel Jiménez-Martín and Teodosio Pérez-Amaral
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Juan-à ngel Jiménez-Martín: Department of Quantitative Economics, Complutense University of Madrid
Teodosio Pérez-Amaral: Department of Quantitative Economics, Complutense University of Madrid
Authors registered in the RePEc Author Service: Teodosio Pérez Amaral and Juan Angel Jimenez Martin

No 767, KIER Working Papers from Kyoto University, Institute of Economic Research

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 sensibly 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 comparing conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 financial crisis. These issues are illustrated using Standard and Poor's 500 Index, with an emphasis on how market risk management practices were encouraged by the Basel II Accord regulations during the financial crisis.

Keywords: Value-at-Risk (VaR); daily capital charges; exogenous and endogenous violations; violation penalties; optimizing strategy; risk forecasts; aggressive or conservative risk management strategies; Basel II Accord; global financial crisis. (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G17 G32 (search for similar items in EconPapers)
Pages: 33pages
Date: 2011-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk, nep-for and nep-rmg
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? (2009)
Working Paper: Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? (2009)
Working Paper: Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? (2009)
Working Paper: Has the Basel II Accord Encouraged Risk Management during the 2008-09 Financial Crisis?
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:767

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