A Note on Estimating Market-Based Minimum Capital Risk Requirements: A Multivariate GARCH Approach

16 Pages Posted: 29 Dec 2002

See all articles by Chris Brooks

Chris Brooks

University of Reading - ICMA Centre

Andrew Clare

City University London - Sir John Cass Business School

Gita Persand

University of Bristol - Department of Economics

Abstract

Internal risk management models of the kind popularized by J.P. Morgan are now used widely by the world's most sophisticated financial institutions as a means of measuring risk. Using the returns on three of the most popular futures contracts on the London International Financial Futures Exchange, in this paper we investigate the possibility of using multivariate generalized autoregressive conditional heteroscedasticity (GARCH) models for the calculation of minimum capital risk requirements (MCRRs). We propose a method for the estimation of the value at risk of a portfolio based on a multivariate GARCH model. We find that the consideration of the correlation between the contracts can lead to more accurate, and therefore more appropriate, MCRRs compared with the values obtained from a univariate approach to the problem.

Suggested Citation

Brooks, Chris and Clare, Andrew D. and Persand, Gita, A Note on Estimating Market-Based Minimum Capital Risk Requirements: A Multivariate GARCH Approach. Manchester School, Vol. 70, pp. 666-681, 2002. Available at SSRN: https://ssrn.com/abstract=330740

Chris Brooks (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Andrew D. Clare

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Gita Persand

University of Bristol - Department of Economics ( email )

8 Woodland Road
Bristol BS8 ITN
United Kingdom

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