An evaluation of the effectiveness of Value-at-Risk (VaR) models for Australian banks under Basel III

Katherine Uylangco and Siqiwen Li
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Katherine Uylangco: Newcastle Business School, University of Newcastle, Callaghan, NSW, Australia
Siqiwen Li: College of Business, Law & Governance, James Cook University, Townsville, QLD, Australia

Australian Journal of Management, 2016, vol. 41, issue 4, 699-718

Abstract: This study compares Value-at-Risk (VaR) measures for Australian banks over a period that includes the Global Financial Crisis (GFC) to determine whether the methodology and parameter selection are important for capital adequacy holdings that will ultimately support a bank in a crisis period. VaR methodology promoted under Basel II was largely criticised during the GFC for its failure to capture downside risk. However, results from this study indicate that 1-year parametric and historical models produce better measures of VaR than models with longer time frames. VaR estimates produced using Monte Carlo simulations show a high percentage of violations but with lower average magnitude of a violation when they occur. VaR estimates produced by the ARMA GARCH model also show a relatively high percentage of violations, however, the average magnitude of a violation is quite low. Our findings support the design of the revised Basel II VaR methodology which has also been adopted under Basel III.

Keywords: Value-at-Risk (VaR); parametric VaR; Monte Carlo simulation; Basel Accords (search for similar items in EconPapers)
JEL-codes: G01 G17 G21 G28 G32 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:41:y:2016:i:4:p:699-718

DOI: 10.1177/0312896214557837

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