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

17 Pages Posted: 14 Sep 2009

See all articles by Michael McAleer

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

Juan-Angel Jiménez-Martin

Complutense University of Madrid

Teodosio Perez Amaral

Complutense University of Madrid - Facultad de Económicas y Empresariales

Date Written: September 14, 2009

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

JEL Classification: G32, G11, G17, C53, C22

Suggested Citation

McAleer, Michael and Jiménez-Martin, Juan-Angel and Perez Amaral, Teodosio, Optimal Risk Management Before, During and After the 2008-09 Financial Crisis (September 14, 2009). Available at SSRN: https://ssrn.com/abstract=1473191 or http://dx.doi.org/10.2139/ssrn.1473191

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

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

Teodosio Perez Amaral

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

Madrid, 28223
Spain

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