Which User-Friendly Model is the Best for BASEL-III? An Emerging Market Study

Sharif Mozumder (), Mohammad Zoynul Abedin (), Raad Lalon () and Amjad Hossain ()
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Sharif Mozumder: University of Dhaka
Mohammad Zoynul Abedin: Swansea University
Raad Lalon: University of Dhaka
Amjad Hossain: University of Chittagong

Computational Economics, 2024, vol. 64, issue 5, No 17, 3049-3086

Abstract: Abstract This paper explores backtesting Value-at-Risk (VaR) and Expected Shortfall (ES) considering ten standard and extended tests in the context of non-technical individual investors trading equities of twenty selected commercial banks listed at the Dhaka Stock Exchange (DSE) using their daily share prices for 11 years (from 2010 to 2020). Following a significant gap in the literature on investigating the efficacy of user-friendly models in quantifying the market risk of banks in emerging economies, this paper adopted four user-friendly models that are relatively straightforward to understand and interpret and are considered representatives of zero, -one, -two, and -three parametric families of all risk models in the literature specifically for the emerging economy of Bangladesh. The popular RiskMetrics™ risk forecast model of JPMorgan, sweeping the world as the most user-friendly conditional alternative to unconditional Gaussian risk forecasts under the framework of VaR, is found not to be adequate under the framework of ES that was recently recommended by Basel-III. The joint score value-based comparison finds the historical simulation (HS) model as the most appropriate model in Bangladesh when models are assessed under a practical user-friendly implementation design. Under this design the Trust Bank Ltd. (TBL), the bank managed and operated by Bangladesh Military, qualifies as the most investor-friendly bank in terms of causing the least frustration to its equity investors over 2010–2020. Overall, augmenting earlier studies in the literature that are mostly for developed markets and are mostly without any ES back-test, we find that the user-friendly model HS is still successful in quantifying market risk over the globe since its relative usefulness gets well established through recent back-tests of VaR and ES in emerging market too.

Keywords: Market risk; BASEL-III; Value at risk; Expected shortfall; Back-test (search for similar items in EconPapers)
JEL-codes: C15 C32 C52 G28 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10614-023-10545-6

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