 Value at Risk, Legislative Framework, Crises, and Procyclicality: what goes wrong?Evangelos Vasileiou and
Aristeidis Samitas
Review of Economic Analysis, 2020, vol. 12, issue 3, 345-369 Abstract: "This study highlights some deficiencies of the stock markets’ risk legislation framework, and particularly the CESR (2010) guidelines. We show that the current legislative framework fails to offer incentives to financial management companies to invest in advanced models for more representative Value at Risk (VaR) estimations, and for this reason, in many cases conventional VaR models are applied. We use data from the DAX, CAC 40, FTSE, FTSEMIB and IBEX indices, and then we apply them to the widely accepted Delta Normal VaR model. The empirical findings show that the conventional VaR models not only fail to provide information for the upcoming financial crises, but also contribute to such phenomena as procyclicality and overreaction in the stock market. We suggest additional tests and we empirically show how these tests could reduce the procyclicality issue and promote a more sustainable investment environment. Even though this study is mainly focused on CESR (2010) guidelines, it could be useful for any similar legislative framework, such as the Basel Accords." Keywords: Financial regulation; Value at Risk; Procyclicality (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ren:journl:v:12:y:2020:i:3:p:345-369 Access Statistics for this article Review of Economic Analysis is currently edited by Dr. Jerzy (Jurek) Konieczny More articles in Review of Economic Analysis from Digital Initiatives at the University of Waterloo Library |
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