Optimal Risk Management Before, During and After the 2008-09 Financial Crisis

Michael McAleer, Juan Jimenez-Martin and Teodosio Perez Amaral
Authors registered in the RePEc Author Service: Teodosio Pérez Amaral

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we advance the idea that optimal risk management under the Basel II Accord will typically require the use of a combination of different models of risk. This idea is illustrated by analyzing the best empirical models of risk for five stock indexes before, during, and after the 2008-09 financial crisis. The data used are the Dow Jones Industrial Average, Financial Times Stock Exchange 100, Nikkei, Hang Seng and Standard and Poor’s 500 Composite Index. The primary goal of the exercise is to identify the best models for risk management in each period according to the minimization of average daily capital requirements under the Basel II Accord. It is found that the best risk models can and do vary before, during and after the 2008-09 financial crisis. Moreover, it is found that an aggressive risk management strategy, namely the supremum strategy that combines different models of risk, can result in significant gains in average daily capital requirements, relative to the strategy of using single models, while staying within the limits of the Basel II Accord.

Keywords: Optimal risk management; average daily capital requirements; alternative risk strategies; value-at-risk forecasts; combining risk models (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G32 (search for similar items in EconPapers)
Date: 2009-09-19, Revised 2009-09-20
New Economics Papers: this item is included in nep-ban, nep-for, nep-reg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
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Forthcoming in Medium for Econometric Application 1.18(2010): pp. 20-28

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Related works:
Working Paper: Optimal Risk Management Before, During and After the 2008-09 Financial Crisis (2009)
Working Paper: Optimal Risk Management Before, During and After the 2008-09 Financial Crisis (2009)
Working Paper: Optimal Risk Management Before, During and After the 2008-09 Financial Crisis (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:20975

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