McAleer, Michael and Jimenez-Martin, Juan-Angel and Perez Amaral, Teodosio (2009): Optimal Risk Management Before, During and After the 2008-09 Financial Crisis. Forthcoming in: Medium for Econometric Application , Vol. 18, No. 1 (April 2010): pp. 20-28.
Download (215Kb) | Preview
In this paper we advance the idea that optimal risk management under the Basel II Accord will typically require the use of a combination of different models of risk. This idea is illustrated by analyzing the best empirical models of risk for five stock indexes before, during, and after the 2008-09 financial crisis. The data used are the Dow Jones Industrial Average, Financial Times Stock Exchange 100, Nikkei, Hang Seng and Standard and Poor’s 500 Composite Index. The primary goal of the exercise is to identify the best models for risk management in each period according to the minimization of average daily capital requirements under the Basel II Accord. It is found that the best risk models can and do vary before, during and after the 2008-09 financial crisis. Moreover, it is found that an aggressive risk management strategy, namely the supremum strategy that combines different models of risk, can result in significant gains in average daily capital requirements, relative to the strategy of using single models, while staying within the limits of the Basel II Accord.
|Item Type:||MPRA Paper|
|Original Title:||Optimal Risk Management Before, During and After the 2008-09 Financial Crisis|
|English Title:||Optimal Risk Management Before, During and After the 2008-09 Financial Crisis|
|Keywords:||Optimal risk management, average daily capital requirements, alternative risk strategies, value-at-risk forecasts, combining risk models|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods; Simulation Methods
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
|Depositing User:||JUAN-ANGEL JIMENEZ-MARTIN|
|Date Deposited:||04. Mar 2010 03:22|
|Last Modified:||14. Feb 2013 19:18|
Basel Committee on Banking Supervision, (1996), Amendment to the Capital Accord to incorporate market risks, BIS, Basel, Switzerland.
Basel Committee on Banking Supervision, (2005), Amendment to the Capital Accord to incorporate market risks, BIS, Basel, Switzerland.
Basel Committee on Banking Supervision, (2009), Proposed enhancements to the Basel II framework, Consultative Document, BIS, Basel, Switzerland.
Caporin, M. and M. McAleer (2009), The Ten Commandments for managing investments, to appear in Journal of Economic Surveys (Available at SSRN: http://ssrn.com/abstract=1342265).
Jiménez-Martín, J.-A., McAleer, M. and T. Pérez-Amaral (2009), The Ten Commandments for managing value-at-risk under the Basel II Accord, to appear in Journal of Economic Surveys (Available at SSRN: http://ssrn.com/abstract=1356803).
Jorion, P. (2000), Value at Risk: The New Benchmark for Managing Financial Risk, McGraw-Hill, New York.
McAleer, M. (2005), Automated inference and learning in modeling financial volatility, Econometric Theory, 21, 232-261.
McAleer, M. (2009), The Ten Commandments for optimizing value-at-risk and daily capital charges, to appear in Journal of Economic Surveys (Available at SSRN: http://ssrn.com/abstract=1354686).
McAleer, M., J.-Á. Jiménez-Martin and T. Pérez-Amaral (2009a), A decision rule to minimize daily capital charges in forecasting value-at-risk, to appear in Journal of Forecasting (Available at SSRN: http://ssrn.com/abstract=1349844).
McAleer, M., J.-Á. Jiménez-Martin and T. Pérez-Amaral (2009b), Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? , Department of Quantitative Economics, Complutense University of Madrid, Spain (Available at SSRN http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1397239).
McAleer, M. and B. da Veiga (2008a), Forecasting value-at-risk with a parsimonious portfolio spillover GARCH (PS-GARCH) model, Journal of Forecasting, 27, 1-19.
McAleer, M. and B. da Veiga (2008b), Single index and portfolio models for forecasting value-at-risk thresholds, Journal of Forecasting, 27, 217-235.
RiskmetricsTM (1996), J.P. Morgan Technical Document, 4th Edition, New York, J.P. Morgan.