Term Structure and Cyclicity of Value-at-Risk: Consequences for the Solvency Capital Requirement

28 Pages Posted: 26 Mar 2009

See all articles by Frederique Bec

Frederique Bec

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); University of Cergy-Pontoise - THEMA

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 2009

Abstract

This paper explores empirically the link between French equities returns Value-at-Risk (VaR) and the state of financial markets cycle. The econometric analysis is based on a simple vector autoregression setup. Using quarterly data from 1970Q4 to 2008Q3, it turns out that the k-year VaR of French equities is strongly dependent on the cycle phase: the expected losses as measured by the VaR are twice smaller in recession times than expansion periods. These results strongly suggest that the European rules regarding the solvency capital requirements for insurance companies should adapt to the state of the financial market's cycle. To this end, we propose a cycle-dependent measure of the Solvency Capital Requirement.

Keywords: expected equities returns, Value at Risk, investment horizon, vector auto-regression

JEL Classification: G11

Suggested Citation

Bec, Frederique and Gollier, Christian, Term Structure and Cyclicity of Value-at-Risk: Consequences for the Solvency Capital Requirement (March 2009). CESifo Working Paper Series No. 2596. Available at SSRN: https://ssrn.com/abstract=1368641

Frederique Bec

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

Christian Gollier (Contact Author)

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 61 12 86 30 (Phone)
+33 61 12 86 37 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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