Template-Type: ReDIF-Paper 1.0
Author-Name: Chang, C-L.
Author-Name-Last: Chang
Author-Name-First: Chia-Lin
Author-Person: pch286
Author-Name: Jiménez-Martín, J.A.
Author-Name-Last: Jiménez-Martín
Author-Name-First: Juan-Ángel
Author-Person: pji27
Author-Name: McAleer, M.J.
Author-Name-Last: McAleer
Author-Name-First: Michael
Author-Person: pmc90
Author-Name: Pérez-Amaral, T.
Author-Name-Last: Pérez-Amaral
Author-Name-First: Teodosio
Author-Person: ppe568
Title: Risk Management of Risk under the Basel Accord: Forecasting Value-at-Risk of VIX Futures
Abstract: The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer, Jimenez-Martin and Perez-Amaral (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices. We examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). We find that an aggressive strategy of choosing the Supremum of the single model forecasts is preferred to the other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, though these are admissible under the Basel II Accord.
Creation-Date: 2011-02-28
File-URL: https://repub.eur.nl/pub/22807/EI2011-11.pdf
File-Format: application/pdf
Series: RePEc:ems:eureir
Number: EI 2011-11
Keywords: C22, C53, G11, G17, G32, VIX futures, Value-at-Risk (VaR), aggressive risk management, basel II Accord, conservative risk management, daily capital charges, global financial crisis (GFC), median strategy, optimizing strategy, violation penalties
Handle: RePEc:ems:eureir:22807