Download this Paper Open PDF in Browser

Do Banks Overstate Their Value-at-Risk?

32 Pages Posted: 29 Sep 2006  

Christophe Perignon

HEC Paris - Finance Department

Zi Yin Deng

Simon Fraser University (SFU) - Beedie School of Business

Zhi Jun Wang

Simon Fraser University (SFU) - Beedie School of Business

Date Written: May 29, 2007

Abstract

This paper is the first empirical study of banks' risk management systems based on non-anonymous daily Value-at-Risk (VaR) and profit-and-loss data. Using actual data from the six largest Canadian commercial banks, we uncover evidence that banks exhibit a systematic excess of conservatism in their VaR estimates. The data used in this paper have been extracted from the banks' annual reports using an innovative Matlab-based data extraction method. Out of the 7,354 trading days analyzed in this study, there are only two exceptions, i.e., days when the actual loss exceeds the disclosed VaR, whereas the expected number of exceptions with a 99% VaR is 74. For each sample bank, we extract from historical VaRs a risk-overstatement coefficient, ranging between 19% and 79%. We attribute VaR overstatement to several factors, including extreme cautiousness and underestimation of diversification effects when aggregating VaRs across business lines and/or risk categories. We also discuss the economic and social cost of reporting inflated VaRs.

Keywords: Value-at-Risk (VaR), Capital Requirement, Backtesting, Disclosure

JEL Classification: G21, G28, G32

Suggested Citation

Perignon, Christophe and Deng, Zi Yin and Wang, Zhi Jun, Do Banks Overstate Their Value-at-Risk? (May 29, 2007). Available at SSRN: https://ssrn.com/abstract=929750 or http://dx.doi.org/10.2139/ssrn.929750

Christophe Perignon (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Zi Yin Deng

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Zhi Jun Wang

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Paper statistics

Downloads
851
Rank
22,101
Abstract Views
3,299