A risk management strategy is proposed as being robust to the Global Financial Crisis (GFC) by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. This risk management strategy is GFC-robust in the sense that maintaining the same risk management strategies before, during and after a financial crisis would lead to comparatively low daily capital charges and violation penalties. The new method is illustrated by using the S&P500 index before, during and after the 2008-09 global financial crisis. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria. The median VaR risk management strategy is GFC-robust as it provides stable results across different periods relative to other VaR forecasting models. The new strategy based on combined forecasts of single models is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.

Basel II Accord, Value-at-Risk (VaR), aggressive risk management strategy, conservative risk management strategy, daily capital charges, global financial crisis, optimizing strategy, robust forecasts, violation penalties
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. (2010). GFC-Robust Risk Management Strategies under the Basel Accord (No. EI 2010-59). Report / Econometric Institute, Erasmus University Rotterdam (pp. 1–29). Erasmus School of Economics. Retrieved from http://hdl.handle.net/1765/20964