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. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index.

Basel accord, aggressive or conservative risk management stretegies, daily capital charges, global financial crisis, optimizing strategy, risk forecasts, value-at-risk (VAR), 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. (2012). Has the Basel Accord Improved Risk Management During the Global Financial Crisis? (No. EI 2012-34). Report / Econometric Institute, Erasmus University Rotterdam (pp. 1–33). Erasmus School of Economics. Retrieved from