Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures

Michael McAleer, Roberto Casarin, Chia-Lin Chang, Juan-à ngel Jiménez-Martín and Teodosio Pérez-Amaral ()
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Juan-à ngel Jiménez-Martín: Department of Quantitative Economics Complutense University of Madrid
Authors registered in the RePEc Author Service: Juan Angel Jimenez Martin

No 784, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: It is well known that the Basel II Accord requires banks and other Authorized Deposit-taking Institutions (ADIs) to communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models, whether individually or as combinations, 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 et al. (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, and extends the approaches given in McAleer et al. (2009) and Chang et al. (2011) to examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). The empirical results suggest that an aggressive strategy of choosing the Supremum of single model forecasts, as compared with Bayesian and non-Bayesian combinations of models, is preferred to other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, which are admissible under the Basel II Accord.

Keywords: Median strategy; Value-at-Risk; daily capital charges; violation penalties; aggressive risk management; conservative risk management; Basel Accord; VIX futures; Bayesian strategy; quantiles; forecast densities. (search for similar items in EconPapers)
JEL-codes: C11 C22 C53 G17 G32 (search for similar items in EconPapers)
Date: 2011-07
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 (24)

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Related works:
Journal Article: Risk management of risk under the Basel Accord: A Bayesian approach to forecasting Value-at-Risk of VIX futures (2013)
Working Paper: Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures (2011)
Working Paper: Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures (2011)
Working Paper: Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures (2011)
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