Do banks overstate their Value-at-Risk?

Christophe Perignon (), Zi Yin Deng and Zhi Jun Wang

Post-Print from HAL

Abstract: This paper is the first empirical study of banks' risk management systems based on non-anonymous daily Value-at-Risk (VaR) and profit-and-loss data. Using actual data from the six largest Canadian commercial banks, we uncover evidence that banks exhibit a systematic excess of conservatism in their VaR estimates. The data used in this paper have been extracted from the banks' annual reports using an innovative Matlab-based data extraction method. Out of the 7354 trading days analyzed in this study, there are only two exceptions, i.e. days when the actual loss exceeds the disclosed VaR, whereas the expected number of exceptions with a 99% VaR is 74. For each sample bank, we extract from historical VaRs a risk-overstatement coefficient, ranging between 19 and 79%. We attribute VaR overstatement to several factors, including extreme cautiousness and underestimation of diversification effects when aggregating VaRs across business lines and/or risk categories. We also discuss the economic and social cost of reporting inflated VaRs.

Keywords: Value-at-Risk (VaR); Capital requirement; Backtesting (search for similar items in EconPapers)
Date: 2008-05-01
References: Add references at CitEc
Citations: View citations in EconPapers (78)

Published in Journal of Banking and Finance, 2008, Vol.32,n°5, pp.789-794. ⟨10.1016/j.jbankfin.2007.05.014⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Do banks overstate their Value-at-Risk? (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00461046

DOI: 10.1016/j.jbankfin.2007.05.014

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().