Backtesting market risk models in a standard normality framework

2007 ◽  
Vol 9 (2) ◽  
pp. 93-111 ◽  
Author(s):  
Kevin Dowd
Keyword(s):  
Market Risk ◽  
Risk Models

Integrating multi-market risk models

2007 ◽  
Vol 10 (2) ◽  
pp. 25-45
Author(s):  
Peter Shepard
Keyword(s):  
Market Risk ◽  
Risk Models

scholarly journals EVALUATING MEASURES OF MARKET RISK IN CIRCUMSTANCES OF GLOBAL FINANCIAL CRISIS – EMPIRICAL EVIDENCE FROM FIVE COUNTRIES

2013 ◽  
Vol 1 ◽  
pp. 75-81
Author(s):  
Ivica Terzić ◽  
Marko Milojević
Keyword(s):  
Value At Risk ◽  
Global Financial Crisis ◽  
Market Risk ◽  
Var Models ◽  
Risk Models ◽  
Historical Simulation ◽  
Rolling Window ◽  
Independence Properties ◽  
Window Approach ◽  
Metrics Model

The purpose of this paper is to evaluate performance of value-at-risk (VaR) produced by two risk models: historical simulation and Risk Metrics. We perform three backtest: unconditional coverage, independence and conditional coverage. We present results on both VaR 1% and VaR 5% on a one-day horizon for the following indices: S&P 500, DAX, SAX, PX and Belex 15. Our results show that Historical simulation 500 days rolling window approach satisfies unconditional coverage for all tested indices, while Risk Metrics has many rejection cases. On the other hand Risk Metrics model satisfies independence backtest for three indices, while Historical simulation has rejected more times. Based on our strong criteria to accept accuracy of VaR models only if both unconditional coverage and independence properties are satisfied, results indicate that during the crisis period all tested VaR models underestimate the true level of market risk exposure.

Market risk models for intraday data

2005 ◽  
Vol 11 (4) ◽  
pp. 309-324 ◽  
Author(s):  
Pierre Giot
Keyword(s):  
Market Risk ◽  
Risk Models ◽  
Intraday Data

scholarly journals Recent Issues in the Implementation of the New Basel Minimum Capital Requirements for Market Risk

2018 ◽  
Vol 2 (2) ◽  
Author(s):  
J. Orgeldinger
Keyword(s):  
Internal Model ◽  
Weighted Average ◽  
Market Risk ◽  
Capital Requirements ◽  
Risk Models ◽  
Minimum Capital ◽  
Basel Committee ◽  
Risk Framework ◽  
Theoretical Foundations ◽  
Model Approach

The Basel Committee suggested new ways of dealing with market risk in banks’ trading and banking books, in its October 2013 consultative paper, and subsequent versions published thereafter, for revised market risk framework FRTB. The Basel Committee estimates that the new rules will result in an approximate median capital increase of 22% and a weighted average capital increase of 40% (BCBS 2016), compared with the current framework. Budget reports on FRTB implementation range from costs of 5-million USD to 250-million USD. Key changes can be found in the internal model approach, in the standard rules and in the approval process. Significant changes introduced by the FRTB include stricter separation of the trading and banking book. Regardless of whether they use standardized or internal models, banks will need to review their portfolios to determine if existing classifications of instruments and desks as trading or banking book are still applicable, or whether a revision of desk structure is needed. In its article ‘Critical appraisal of the Basel fundamental review of the trading book regulation’ (Orgeldinger 2017) the theoretical foundations of the internal model approach IMA were analysed and the criticisms for FRTB risk models were investigated. A recent onslaught of rules is rendering the existing timeline for implementation practically impossible. In this article we present and critically evaluate different approaches to implement the new rules suggested by academics and major consulting companies.

Part III Investment Banking, 13 Trading Book—Standardized Approaches

2018 ◽  
Author(s):  
Gleeson Simon
Keyword(s):  
Default Risk ◽  
Investment Banking ◽  
Market Risk ◽  
Expected Shortfall ◽  
Capital Adequacy ◽  
Third Party ◽  
Regulatory Capital ◽  
Var Models ◽  
Risk Models ◽  
Basel 3

This chapter discusses trading book models. Risk models come in a variety of types. However, for market risk purposes there have been a number of types which may be used within the framework. The simplest is the ‘CAD 1’ model — named after the first Capital Adequacy Directive, which permitted such models to be used in the calculation of regulatory capital. VaR models, permitted by Basel 2, were more complex, and this complexity was increased by Basel 2.5, which required the use of ‘stressed VAR’. In due course all of this will be replaced by the Basel 3 FRTB calculation, which rejects VAR and is based on the calculation of an expected shortfall (ES) market risk charge, a VaR based default risk charge (DRC) (for those exposures where the bank is exposed to the default of a third party), and a stressed ES-based capital add-on.

Comprehensive risk measure – current challenges

2014 ◽  
Vol 22 (3) ◽  
pp. 271-284 ◽  
Author(s):  
Lukasz Prorokowski ◽  
Hubert Prorokowski
Keyword(s):  
Value At Risk ◽  
Risk Measure ◽  
Market Risk ◽  
Structured Interviews ◽  
Regulatory Requirements ◽  
Risk Models ◽  
Content Type ◽  
Basel Committee ◽  
New Methodologies ◽  
Global Banks

Purpose – This paper, based on case-studies with five universal banks from Europe and North America, aims to investigate which types of comprehensive risk measure (CRM) models are being used in the industry, the challenges being faced in implementation and how they are being currently rectified. Undoubtedly, CRM remains the most challenging and ambiguous measure applied to the correlation trading book. The turmoil surrounding the new regulatory framework boils down to the Basel Committee implementing a range of capital charges for market risk to promote “safer” banking in times of financial crisis. This report discusses current issues faced by global banks when complying with the complex set of financial rules imposed by Basel 2.5. Design/methodology/approach – The current research project is based on in-depth, semi-structured interviews with five universal banks to explore the strides major banks are taking to introduce CRM modelling while complying with the new regulatory requirements. Findings – There are three measures introduced by the Basel Committee to serve as capital charges for market risk: incremental risk charge; stressed value at risk and CRM. All of these regulatory-driven measures have met with strong criticism for their cumbersome nature and extremely high capital charges. Furthermore, with banks facing imminent implementation deadlines, all challenges surrounding CRM must be rectified. This paper provides some practical insights into how banks are finalising the new methodologies to comply with Basel 2.5. Originality/value – The introduction of CRM and regulatory approval of new internal market risk models under Basel 2.5 has exerted strong pressure on global banks. The issues and computational challenges surrounding the implementation of CRM methodologies are currently fiercely debated among the affected banks. With little guidance from regulators, it remains very unclear how to implement, calculate and validate CRM in practice. To this end, a need for a study that sheds some light on practices with developing and computing CRM emerged. On submitting this paper to the journal, we have received news that JP Morgan is to pay four regulators $920 million as a result of a CRM-related scandal.

Developing a stress testing framework based on market risk models

2008 ◽  
Vol 32 (10) ◽  
pp. 2220-2236 ◽  
Author(s):  
Carol Alexander ◽  
Elizabeth Sheedy
Keyword(s):  
Stress Testing ◽  
Market Risk ◽  
Risk Models ◽  
Testing Framework
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