When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor’s 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits.

aggressive risk strategy, conservative risk strategy, risk management, value-at-risk forecast, violations
Time-Series Models; Dynamic Quantile Regressions (jel C22), Forecasting and Other Model Applications (jel C53), Portfolio Choice; Investment Decisions (jel G11), Financial Forecasting (jel G17), Financing Policy; Capital and Ownership Structure (jel G32)
Erasmus School of Economics
Econometric Institute Research Papers
Report / Econometric Institute, Erasmus University Rotterdam
Erasmus School of Economics

McAleer, M.J, Jiménez-Martín, J.A, & Pérez-Amaral, T. (2009). What Happened to Risk Management During the 2008-09 Financial Crisis? (No. EI 2009-17). Report / Econometric Institute, Erasmus University Rotterdam (pp. 1–13). Erasmus School of Economics. Retrieved from http://hdl.handle.net/1765/16512