GFC-robust risk management under the Basel Accord using extreme value methodologies

Juan Jimenez-Martin, Michael McAleer, Teodosio Pérez-Amaral and Paulo Araújo Santos

Mathematics and Computers in Simulation (MATCOM), 2013, vol. 94, issue C, 223-237

Abstract: In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. The median is not affected by extremes, unlike the mean. In periods of contagion, wherein the number and values of extremes are substantially greater, the use of the median would be expected to be even more robust than the mean. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008–2009 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

Keywords: Value-at-Risk (VaR); DPOT; Daily capital charges; Robust forecasts (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G17 G32 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: GFC-Robust Risk Management under the Basel Accord using Extreme Value Methodologies (2013)
Working Paper: GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies (2011)
Working Paper: GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies (2011)
Working Paper: GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies (2011)
Working Paper: GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:94:y:2013:i:c:p:223-237

DOI: 10.1016/j.matcom.2013.08.010

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