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Lambda Value at Risk and Regulatory Capital: A Dynamic Approach to Tail Risk

Asmerilda Hitaj (), Cesario Mateus () and Ilaria Peri ()
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Asmerilda Hitaj: Department of Statistics and Quantitative Methods, University of Milan Bicocca, U7, Via Bicocca degli Arcimboldi 8, Milan 20126, Italy
Cesario Mateus: Department of Accounting and Finance, University of Greenwich, Old Royal Naval College, Park Row, London SE10 9LS, UK
Ilaria Peri: Department of Economics, Mathematics and Statistics, Birkbeck University of London, Malet St, Bloomsbury, London WC1E 7HX, UK

Risks, 2018, vol. 6, issue 1, 1-18

Abstract: This paper presents the first methodological proposal of estimation of the Λ V a R . Our approach is dynamic and calibrated to market extreme scenarios, incorporating the need of regulators and financial institutions in more sensitive risk measures. We also propose a simple backtesting methodology by extending the V a R hypothesis-testing framework. Hence, we test our Λ V a R proposals under extreme downward scenarios of the financial crisis and different assumptions on the profit and loss distribution. The findings show that our Λ V a R estimations are able to capture the tail risk and react to market fluctuations significantly faster than the V a R and expected shortfall. The backtesting exercise displays a higher level of accuracy for our Λ V a R estimations.

Keywords: banking regulation; financial risk management; risk modelling; value at risk (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 M2 M4 K2 (search for similar items in EconPapers)
Date: 2018
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