GFC-Robust Risk Management Strategies under the Basel Accord

29 Pages Posted: 9 Oct 2010

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: October 6, 2010

Abstract

A risk management strategy is proposed as being robust to the Global Financial Crisis (GFC) by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. This risk management strategy is GFC-robust in the sense that maintaining the same risk management strategies before, during and after a financial crisis would lead to comparatively low daily capital charges and violation penalties. The new method is illustrated by using the S&P500 index before, during and after the 2008-09 global financial crisis. 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. The median VaR risk management strategy is GFC-robust as it provides stable results across different periods relative to other VaR forecasting models. The new strategy based 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), daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management strategy, conservative risk management strategy, Basel II Accord, global financial crisis.

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

Suggested Citation

McAleer, Michael and Jiménez-Martin, Juan-Angel and Perez Amaral, Teodosio, GFC-Robust Risk Management Strategies under the Basel Accord (October 6, 2010). Available at SSRN: https://ssrn.com/abstract=1688385 or http://dx.doi.org/10.2139/ssrn.1688385

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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