The value of Value-at-Risk: A theoretical approach to the pricing and performance of risk measurement systems

Zvi Wiener

Journal of Economics and Business, 2012, vol. 64, issue 3, 199-213

Abstract: Risk-based capital adequacy requirements are the main tool employed by government regulators to assure bank stability. This approach allows banks to choose from a number of alternative methods for calculating the required capital. Many systems for measuring risk differ significantly in cost, precision, and in the potential “capital savings”. We develop a statistical model for evaluating risk measurement systems and optimizing the selection process. The model is based on queuing theory. The selection of the optimal system is a function of available capital, the volume and the character of bank activity. While the most precise system may lower a bank's minimal capital reserve requirements, it is not necessarily the optimal system once total costs are evaluated.

Keywords: Basel accord; Capital adequacy; Risk measurement; Value-at-Risk (VaR); Queuing theory; Erlang formula; Financial institution regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:64:y:2012:i:3:p:199-213

DOI: 10.1016/j.jeconbus.2012.02.002

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