The Ten Commandments for Managing Value-at-Risk under the Basel II Accord

10 Pages Posted: 11 Mar 2009 Last revised: 9 Aug 2009

See all articles by Juan-Angel Jiménez-Martin

Juan-Angel Jiménez-Martin

Complutense University of Madrid

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Teodosio Perez Amaral

Complutense University of Madrid - Facultad de Económicas y Empresariales

Date Written: March 10, 2009

Abstract

Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions (ADIs) are required to communicate their daily market risk estimates to the relevant national monetary authority at the beginning of each trading day, using one of a variety of Value-at-Risk (VaR) models to measure risk. The purpose of this paper is to provide a simple explanation and a set of prescriptions for managing VaR under the Basel II Accord. The commandments deal with understanding the Basel II colours, understanding the risk model before choosing, varying the choice of risk model, avoiding the green zone and being willing to violate, incurring large violations, stopping before the red zone, avoiding frequent violations, avoiding the estimation of large portfolios, aggregating portfolios into a single index, and interpreting commandments sensibly as guidelines.

Keywords: Financial portfolios, daily capital charges, frequency of violations, magnitude of violations, optimizing strategy, risk forecasts, value-at-risk, green zone, red zone

JEL Classification: G32, G11, G17

Suggested Citation

Jiménez-Martin, Juan-Angel and McAleer, Michael and Perez Amaral, Teodosio, The Ten Commandments for Managing Value-at-Risk under the Basel II Accord (March 10, 2009). Available at SSRN: https://ssrn.com/abstract=1356803 or http://dx.doi.org/10.2139/ssrn.1356803

Juan-Angel Jiménez-Martin (Contact Author)

Complutense University of Madrid ( email )

Complutense University of Madrid
Campus de somosaguas
Pozuelo de Alarcon, Madrid 28223
Spain
+34 91 3942355 (Phone)

HOME PAGE: http://www.ucm.es/fundamentos-analisis-economico2/jajm

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

Teodosio Perez Amaral

Complutense University of Madrid - Facultad de Económicas y Empresariales ( email )

Madrid, 28223
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,040
Abstract Views
6,575
rank
23,536
PlumX Metrics