The impact of the choice of VaR models on the level of regulatory capital according to Basel II

Oliver Hermsen

Quantitative Finance, 2010, vol. 10, issue 10, 1215-1224

Abstract: The Basel II framework allows the calculation of the capital requirements for market risk with Value-at-Risk models. Since no special model is prescribed in the framework, banks may use simple models with questionable assumptions concerning their underlying distributions. Our numerical analysis reveals that simple VaR models that perform noticeably worse than comparable simple models with more realistic assumptions may lead to a lower level of regulatory capital for banks. For this reason, banks have a major incentive to implement bad models. This is obviously contrary to the interests of regulatory authorities.

Keywords: Value at Risk; Non-Gaussian distributions; Structure of financial markets; Risk management; Risk measures; Numerical simulation; Extreme risk and insurance; Market risk (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/14697680903419701

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