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

Michael McAleer, Jimenez-Marin, J-. A. and Perez-Amaral, T.
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Perez-Amaral, T.: Erasmus Econometric Institute

No EI 2009-17 Revision_Date: 2009-11-06, Econometric Institute Report from Erasmus University Rotterdam, 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: risk management; violations; aggressive risk strategy; conservative risk strategy; value-at-risk forecast (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-reg and nep-rmg
Date: 2009-08-18

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http://hdl.handle.net/1765/16512 (application/pdf)

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)
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:eureir:1765016512

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