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Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures

Chia-Lin Chang, Juan-à ngel Jiménez-Martín, Michael McAleer and Teodosio Pérez-Amaral
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Juan-à ngel Jiménez-Martín: Department of Quantitative Economics, Complutense University of Madrid
Teodosio Pérez-Amaral: Department of Quantitative Economics, Complutense University of Madrid

Authors registered in the RePEc Author Service: Juan Angel Jimenez Martin () and Teodosio Pérez Amaral ()

No 761, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer, Jimenez-Martin and Perez- Amaral (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices. We examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). We find that an aggressive strategy of choosing the Supremum of the single model forecasts is preferred to the other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, though these are admissible under the Basel II Accord.

Keywords: Median strategy; Value-at-Risk (VaR); daily capital charges; violation penalties; optimizing strategy; aggressive risk management; conservative risk management; Basel II Accord; VIX futures; global financial crisis (GFC). (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G17 G32 (search for similar items in EconPapers)
Pages: 30pages
Date: 2011-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk, nep-for and nep-rmg
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Citations: View citations in EconPapers (23)

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Working Paper: Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures (2011) Downloads
Working Paper: Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures (2011) Downloads
Working Paper: Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:761

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