GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies

Paulo Araújo Santos, Juan Jimenez-Martin, Michael McAleer and Teodosio Pérez-Amaral
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Paulo Araújo Santos: Escola Superior de Gestão e Tecnologia de Santarém and Center of Statistics and Applications, University of Lisbon

No 2011-27, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: In McAleer et al. (2010b), a robust risk management strategy to the Global Financial Crisis (GFC) was proposed under the Basel II Accord by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast was based on the median of the point VaR forecasts of a set of conditional volatility models. In this paper we provide further evidence on the suitability of the median as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

Keywords: Value-at-Risk (VaR); DPOT; daily capital charges; robust forecasts; violation penalties; optimizing strategy; aggressive risk management; conservative risk management; Basel; global financial crisis. (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G17 G32 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-for and nep-rmg
Note: The authors are most grateful for the helpful comments and suggestions of participants at the International Conference on Risk Modelling and Management, Madrid, Spain, June 2011. For financial support, the third author wishes to thank the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science. The second and fourth authors acknowledge the financial support of the Ministerio de Ciencia y Tecnología and Comunidad de Madrid, Spain.
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https://eprints.ucm.es/id/eprint/12968/1/1127.pdf july 2011 (application/pdf)

Related works:
Journal Article: GFC-robust risk management under the Basel Accord using extreme value methodologies (2013)
Working Paper: GFC-Robust Risk Management under the Basel Accord using Extreme Value Methodologies (2013)
Working Paper: GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies (2011)
Working Paper: GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies (2011)
Working Paper: GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies (2011)
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