Best Practices in Measuring and Managing Market Risks after 2008 Crisis

12 Pages Posted: 26 Dec 2009

See all articles by Antonio F. A. Silva Jr.

Antonio F. A. Silva Jr.

Federal University of Bahia - UFBA

Pablo Jose Campos de Carvalho

Banco Central do Brasil

Jose Renato Haas Ornelas

Banco Central do Brasil

Date Written: December 26, 2009

Abstract

This paper discusses assumptions behind market risk measures and models. Using a sample period that includes the 2008 international financial crisis, we run a case study with four market risk models: Riskmetics(TM), Historical Simulation, Mixture of Normal with Monte Carlo Simulation and an approach based on Extreme Value Theory. We argue that the trend in the industry is for more sophisticated models, but the necessary degree of complexity is not so clear. We also conclude that the appropriate approach is not to rely only in a single model or measure for market risk management. In fact, as market participants know all the assumptions behind market risk models and measures, the challenge is to build a risk management strategy that takes into account a framework more complex than relying on a single number.

Keywords: Risk Management, Crisis, Historical Simulation, RiskMetrics, Misture of Normals, EVT

Suggested Citation

Silva Jr., Antonio F. A. and de Carvalho, Pablo Jose Campos and Ornelas, Jose Renato Haas, Best Practices in Measuring and Managing Market Risks after 2008 Crisis (December 26, 2009). Available at SSRN: https://ssrn.com/abstract=1528426 or http://dx.doi.org/10.2139/ssrn.1528426

Antonio F. A. Silva Jr. (Contact Author)

Federal University of Bahia - UFBA ( email )

Av. Reitor Miguel Calmon, s/n
Vale do Canela
Salvador, Bahia
Brazil

Pablo Jose Campos De Carvalho

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Jose Renato Haas Ornelas

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900
Brazil

HOME PAGE: http://www.bcb.gov.br

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