The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges

Michael McAleer

No 2009-10, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: Credit risk is the most important type of risk in terms of monetary value. Another key risk measure is market risk, which is concerned with stocks and bonds, and related financial derivatives, as well as exchange rates and interest rates. This paper is concerned with market risk management and monitoring under the Basel II Accord, and presents Ten Commandments for optimizing Value-at-Risk (VaR) and daily capital charges, based on choosing wisely from: (1) conditional, stochastic and realized volatility; (2) symmetry, asymmetry and leverage; (3) dynamic correlations and dynamic covariances; (4) single index and portfolio models; (5) parametric, semiparametric and nonparametric models; (6) estimation, simulation and calibration of parameters; (7) assumptions, regularity conditions and statistical properties; (8) accuracy in calculating moments and forecasts; (9) optimizing threshold violations and economic benefits; and (10) optimizing private and public benefits of risk management. For practical purposes, it is found that the Basel II Accord would seem to encourage excessive risk taking at the expense of providing accurate measures and forecasts of risk and VaR.

Keywords: Daily capital charges; Excessive risk taking Market risk; Risk management; Value-at-risk; Violations. (search for similar items in EconPapers)
JEL-codes: C53 G11 G17 G32 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2009
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: THE TEN COMMANDMENTS FOR OPTIMIZING VALUE‐AT‐RISK AND DAILY CAPITAL CHARGES (2009)
Working Paper: The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges (2009)
Working Paper: The Ten Commandments for Optimizing Value-at-Risk and Daily Capital Charges (2009)
Working Paper: The ten commandments for optimizing value-at-risk and daily capital charges (2008)
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