Comprehensive risk measure – current challenges

2014 ◽  
Vol 22 (3) ◽  
pp. 271-284 ◽  
Author(s):  
Lukasz Prorokowski ◽  
Hubert Prorokowski
Keyword(s):  
Value At Risk ◽  
Risk Measure ◽  
Market Risk ◽  
Structured Interviews ◽  
Regulatory Requirements ◽  
Risk Models ◽  
Content Type ◽  
Basel Committee ◽  
New Methodologies ◽  
Global Banks

Purpose – This paper, based on case-studies with five universal banks from Europe and North America, aims to investigate which types of comprehensive risk measure (CRM) models are being used in the industry, the challenges being faced in implementation and how they are being currently rectified. Undoubtedly, CRM remains the most challenging and ambiguous measure applied to the correlation trading book. The turmoil surrounding the new regulatory framework boils down to the Basel Committee implementing a range of capital charges for market risk to promote “safer” banking in times of financial crisis. This report discusses current issues faced by global banks when complying with the complex set of financial rules imposed by Basel 2.5. Design/methodology/approach – The current research project is based on in-depth, semi-structured interviews with five universal banks to explore the strides major banks are taking to introduce CRM modelling while complying with the new regulatory requirements. Findings – There are three measures introduced by the Basel Committee to serve as capital charges for market risk: incremental risk charge; stressed value at risk and CRM. All of these regulatory-driven measures have met with strong criticism for their cumbersome nature and extremely high capital charges. Furthermore, with banks facing imminent implementation deadlines, all challenges surrounding CRM must be rectified. This paper provides some practical insights into how banks are finalising the new methodologies to comply with Basel 2.5. Originality/value – The introduction of CRM and regulatory approval of new internal market risk models under Basel 2.5 has exerted strong pressure on global banks. The issues and computational challenges surrounding the implementation of CRM methodologies are currently fiercely debated among the affected banks. With little guidance from regulators, it remains very unclear how to implement, calculate and validate CRM in practice. To this end, a need for a study that sheds some light on practices with developing and computing CRM emerged. On submitting this paper to the journal, we have received news that JP Morgan is to pay four regulators $920 million as a result of a CRM-related scandal.

Compliance with Basel 2.5: banks’ approaches to implementing stressed VaR

2014 ◽  
Vol 22 (4) ◽  
pp. 339-348 ◽  
Author(s):  
Lukasz Prorokowski ◽  
Hubert Prorokowski
Keyword(s):  
Financial Services ◽  
Value At Risk ◽  
Risk Measure ◽  
Market Risk ◽  
Poor Quality ◽  
Theory And Practice ◽  
Structured Interviews ◽  
Content Type ◽  
Regulatory Guidance ◽  
Wide Range

Purpose – The purpose of this paper is to outline how banks are coping with the new regulatory challenges posed by stressed value at risk (SVaR). The Basel Committee has introduced three measures of capital charges for market risk: incremental risk charge (IRC), SVaR and comprehensive risk measure (CRM). This paper is designed to analyse the methodologies for SVaR deployed at different banks to highlight the SVaR-related challenges stemming from complying with Basel 2.5. This revised market risk framework comes into force in Europe in 2012. Among the wide range of changes is the requirement for banks to calculate SVaR at a 99 per cent confidence interval over a period of significant stress. Design/methodology/approach – The current research project is based on in-depth, semi-structured interviews with nine universal banks and one financial services company to explore the strides major banks are taking to implement SVaR methodologies while complying with Basel 2.5. Findings – This paper focuses on strengths and weaknesses of the SVaR approach while reviewing peer practices of implementing SVaR modelling. Interestingly, the surveyed banks have not indicated significant challenges associated with implementation of SVaR, and the reported problems boil down to dealing with the poor quality of market data and, as in cases of IRC and CRM, the lack of regulatory guidance. As far as peer practices of implementing SVaR modelling are concerned, the majority of the surveyed banks utilise historical simulations and apply both the absolute and relative measures of volatility for different risk factors. Originality/value – The academic studies that explicitly analyse challenges associated with implementing the stressed version of VaR are scarce. Filling in the gap in the existing academic literature, this paper aims to shed some explanatory light on the issues major banks are facing when calculating SVaR. In doing so, this study adequately bridges theory and practice by contributing to the fierce debate on compliance with Basel 2.5.

Market risk assessment

2020 ◽  
Vol 21 (2) ◽  
pp. 111-126 ◽  
Author(s):  
Athanasios Kokoris ◽  
Fragiskos Archontakis ◽  
Christos Grose
Keyword(s):  
Risk Assessment ◽  
Confidence Level ◽  
Value At Risk ◽  
Risk Model ◽  
Risk Measure ◽  
Market Risk ◽  
Business Community ◽  
Data Set ◽  
Content Type ◽  
Regulatory Authorities

Purpose This study aims to examine whether the methodology proposed by the European Supervisory Authorities (ESAs) within Delegated Regulation (European Union) 2017/653 for the calculation of market risk of certain packaged retail and insurance-based investment products (PRIIPs) is the most appropriate. Design/methodology/approach Risk models are put into effect to validate the appropriateness of the methodology announced by ESAs. ESAs have announced that the unit-linked (UL) products, labeled as Category II PRIIPs, will be subject to the Cornish–Fisher value-at-risk (CFVaR) methodology for their market risk assessment. We test CFVaR at 97.5% confidence level on 70 UL products, and we test Cornish–Fisher expected shortfall (CFES) at the same confidence level, which acts as a counter methodology for CFVaR. Findings The paper provides empirical insights about the Cornish-Fisher (CF) expansion being a method that incorporates the possibility of financial instability. When CFVaR by ESAs is calculated, it is shown that CF is in general a more robust risk model than the simpler historical ones. However, when CFES is applied, important points are derived. First, only in half of the occasions the CF expansion can be considered as a reliable method. Second, the CFES is a more coherent risk measure than CFVaR. We conclude that the CF expansion is unable to accurately estimate the market risk of UL products when excessive fat-tailed or non-symmetrical distributions are present. Hence, we suggest that a different methodology could also be considered by the regulatory bodies which will capture the excessive values of products in financial distress. Originality/value Literature, both theoretical and applied, regarding PRIIPs, is not extended. Although business and regulators research has begun to intensify in the last two years, to our knowledge this is one of the first studies that uses the CFES methodology for market risk assessment of Category II PRIIPs. In addition, we use a unique data set from a country in the headwinds of the recent financial crisis. This research contributes both to the academic and business community by enriching the existing literature and aiding risk managers in assessing the market risk of certain Category II PRIIPs. Considering the recent efforts of the regulatory authorities at the beginning of 2020 to implement certain amendments to the PRIIPs, we indicate relative risks related with the calculation of the market risk of the aforementioned products. Our findings could contribute to regulatory authorities’ persistent efforts in wrapping up this ongoing project.

scholarly journals EVALUATING MEASURES OF MARKET RISK IN CIRCUMSTANCES OF GLOBAL FINANCIAL CRISIS – EMPIRICAL EVIDENCE FROM FIVE COUNTRIES

2013 ◽  
Vol 1 ◽  
pp. 75-81
Author(s):  
Ivica Terzić ◽  
Marko Milojević
Keyword(s):  
Value At Risk ◽  
Global Financial Crisis ◽  
Market Risk ◽  
Var Models ◽  
Risk Models ◽  
Historical Simulation ◽  
Rolling Window ◽  
Independence Properties ◽  
Window Approach ◽  
Metrics Model

The purpose of this paper is to evaluate performance of value-at-risk (VaR) produced by two risk models: historical simulation and Risk Metrics. We perform three backtest: unconditional coverage, independence and conditional coverage. We present results on both VaR 1% and VaR 5% on a one-day horizon for the following indices: S&P 500, DAX, SAX, PX and Belex 15. Our results show that Historical simulation 500 days rolling window approach satisfies unconditional coverage for all tested indices, while Risk Metrics has many rejection cases. On the other hand Risk Metrics model satisfies independence backtest for three indices, while Historical simulation has rejected more times. Based on our strong criteria to accept accuracy of VaR models only if both unconditional coverage and independence properties are satisfied, results indicate that during the crisis period all tested VaR models underestimate the true level of market risk exposure.

Valuation of initial margin using bootstrap method

2020 ◽  
Vol 21 (5) ◽  
pp. 543-557
Author(s):  
Modisane Bennett Seitshiro ◽  
Hopolang Phillip Mashele
Keyword(s):  
Probability Distribution ◽  
Financial Market ◽  
Value At Risk ◽  
Risk Model ◽  
Risk Measure ◽  
Bootstrap Method ◽  
Parametric Bootstrap ◽  
Spillover Effects ◽  
Content Type ◽  
Significance Level

Purpose The purpose of this paper is to propose the parametric bootstrap method for valuation of over-the-counter derivative (OTCD) initial margin (IM) in the financial market with low outstanding notional amounts. That is, an aggregate outstanding gross notional amount of OTC derivative instruments not exceeding R20bn. Design/methodology/approach The OTCD market is assumed to have a Gaussian probability distribution with the mean and standard deviation parameters. The bootstrap value at risk model is applied as a risk measure that generates bootstrap initial margins (BIM). Findings The proposed parametric bootstrap method is in favour of the BIM amounts for the simulated and real data sets. These BIM amounts are reasonably exceeding the IM amounts whenever the significance level increases. Research limitations/implications This paper only assumed that the OTCD returns only come from a normal probability distribution. Practical implications The OTCD IM requirement in respect to transactions done by counterparties may affect the entire financial market participants under uncleared OTCD, while reducing systemic risk. Thus, reducing spillover effects by ensuring that collateral (IM) is available to offset losses caused by the default of a OTCDs counterparty. Originality/value This paper contributes to the literature by presenting a valuation of IM for the financial market with low outstanding notional amounts by using the parametric bootstrap method.

An investigation into the roles, characteristics, expectations and evaluation practices of audit committees

2015 ◽  
Vol 30 (8/9) ◽  
pp. 727-755 ◽  
Author(s):  
Nonna Martinov-Bennie ◽  
Dominic S.B. Soh ◽  
Dale Tweedie
Keyword(s):  
Audit Committee ◽  
Active Role ◽  
Audit Committees ◽  
Regulatory Change ◽  
Structured Interviews ◽  
Regulatory Requirements ◽  
Content Type ◽  
Evaluation Practices ◽  
Primary Driver ◽  
And Performance

Purpose – This paper aims to investigate how the roles, characteristics, expectations and evaluation practices of audit committees have adapted to regulatory change and what practices are most conducive to effective audit committees. Design/methodology/approach – This paper uses semi-structured interviews with audit committee chairs and chief audit executives. Findings – While new regulation is a primary driver of changes in the roles of audit committees, the audit committee’s role has evolved beyond regulatory requirements. Audit committees are taking a more active role in organisational governance and performance in key areas such as risk management. However, while audit committees have a clear concept of what characteristics committee members require, conceptual frameworks and mechanisms for evaluating the performance of committees and their members remain underdeveloped. Research limitations/implications – The responses of audit committees in Australia to broader regulatory trends suggest that more research is required into how audit committees function in practice, and into developing new frameworks for evaluating the committees’ performance. This paper provides an in-depth exploration of key areas of audit committee performance, and identifies aspects that might be further investigated. Practical implications – The paper identifies key attributes of effective audit committees and especially the characteristics of audit committee members. The paper also identifies a need to improve – and in many cases create – performance evaluation frameworks and mechanisms. Given the international regulatory trend towards greater reliance on audit committees to improve governance, more policy attention is required on developing guidelines and assessment processes that evaluate whether audit committees are fulfilling their legislative mandate in practice. Originality/value – The paper contributes to the relatively new and more specific discussion on reviewing and evaluating the performance of the board and its subcommittees.

scholarly journals Recent Issues in the Implementation of the New Basel Minimum Capital Requirements for Market Risk

2018 ◽  
Vol 2 (2) ◽  
Author(s):  
J. Orgeldinger
Keyword(s):  
Internal Model ◽  
Weighted Average ◽  
Market Risk ◽  
Capital Requirements ◽  
Risk Models ◽  
Minimum Capital ◽  
Basel Committee ◽  
Risk Framework ◽  
Theoretical Foundations ◽  
Model Approach

The Basel Committee suggested new ways of dealing with market risk in banks’ trading and banking books, in its October 2013 consultative paper, and subsequent versions published thereafter, for revised market risk framework FRTB. The Basel Committee estimates that the new rules will result in an approximate median capital increase of 22% and a weighted average capital increase of 40% (BCBS 2016), compared with the current framework. Budget reports on FRTB implementation range from costs of 5-million USD to 250-million USD. Key changes can be found in the internal model approach, in the standard rules and in the approval process. Significant changes introduced by the FRTB include stricter separation of the trading and banking book. Regardless of whether they use standardized or internal models, banks will need to review their portfolios to determine if existing classifications of instruments and desks as trading or banking book are still applicable, or whether a revision of desk structure is needed. In its article ‘Critical appraisal of the Basel fundamental review of the trading book regulation’ (Orgeldinger 2017) the theoretical foundations of the internal model approach IMA were analysed and the criticisms for FRTB risk models were investigated. A recent onslaught of rules is rendering the existing timeline for implementation practically impossible. In this article we present and critically evaluate different approaches to implement the new rules suggested by academics and major consulting companies.

scholarly journals Value-at-risk predictive performance: a comparison between the CaViaR and GARCH models for the MILA and ASEAN-5 stock markets

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ramona Serrano Bautista ◽  
José Antonio Nuñez Mora
Keyword(s):  
At Risk ◽  
Latin America ◽  
Stock Markets ◽  
Value At Risk ◽  
Predictive Performance ◽  
Market Risk ◽  
Global Market ◽  
Garch Models ◽  
Content Type ◽  
Emerging Stock Markets

PurposeThis paper tests the accuracies of the models that predict the Value-at-Risk (VaR) for the Market Integrated Latin America (MILA) and Association of Southeast Asian Nations (ASEAN) emerging stock markets during crisis periods.Design/methodology/approachMany VaR estimation models have been presented in the literature. In this paper, the VaR is estimated using the Generalized Autoregressive Conditional Heteroskedasticity, EGARCH and GJR-GARCH models under normal, skewed-normal, Student-t and skewed-Student-t distributional assumptions and compared with the predictive performance of the Conditional Autoregressive Value-at-Risk (CaViaR) considering the four alternative specifications proposed by Engle and Manganelli (2004).FindingsThe results support the robustness of the CaViaR model in out-sample VaR forecasting for the MILA and ASEAN-5 emerging stock markets in crisis periods. This evidence is based on the results of the backtesting approach that analyzed the predictive performance of the models according to their accuracy.Originality/valueAn important issue in market risk is the inaccurate estimation of risk since different VaR models lead to different risk measures, which means that there is not yet an accepted method for all situations and markets. In particular, quantifying and forecasting the risk for the MILA and ASEAN-5 stock markets is crucial for evaluating global market risk since the MILA is the biggest stock exchange in Latin America and the ASEAN region accounted for 11% of the total global foreign direct investment inflows in 2014. Furthermore, according to the Asian Development Bank, this region is projected to average 7% annual growth by 2025.

Selection of Value-at-Risk models for MENA Islamic indices

2020 ◽  
Vol 11 (9) ◽  
pp. 1689-1708
Author(s):  
Wassim Ben Ayed ◽  
Ibrahim Fatnassi ◽  
Abderrazak Ben Maatoug
Keyword(s):  
At Risk ◽  
Risk Management ◽  
Value At Risk ◽  
Prediction Models ◽  
Market Risk ◽  
Parametric Models ◽  
Arch Model ◽  
Var Models ◽  
Content Type ◽  
Cent Level

Purpose The purpose of this study is to investigate the performance of Value-at-Risk (VaR) models for nine Middle East and North Africa Islamic indices using RiskMetrics and VaR parametric models. Design/methodology/approach The authors test the performance of several VaR models using Kupiec and Engle and Manganelli tests at 95 and 99 per cent levels for long and short trading positions, respectively, for the period from August 10, 2006 to December 14, 2014. Findings The authors’ findings show that the VaR under Student and skewed Student distribution are preferred at a 99 per cent level VaR. However, at 95 per cent level, the VaR forecasts obtained under normal distribution are more accurate than those generated using models with fat-tailed distributions. These results suggest that VaR is a good tool for measuring market risk. The authors support the use of RiskMetrics during calm periods and the asymmetric models (Generalized Autoregressive Conditional Heteroskedastic and the Asymmetric Power ARCH model) during stressed periods. Practical implications These results will be useful to investors and risk managers operating in Islamic markets, because their success depends on the ability to forecast stock price movements. Therefore, because a few Islamic financial institutions use internal models for their capital calculations, the regulatory committee should enhance market risk disclosure. Originality/value This study contributes to the knowledge in this area by improving our understanding of market risk management for Islamic assets during the stress periods. Then, it highlights important implications regarding financial risk management. Finally, this study fills a gap in the literature, as most empirical studies dealing with evaluating VaR prediction models have focused on quantifying the model risk in the conventional market.

scholarly journals Bounds of Adj-TVaR Prediction for Aggregate Risk

2019 ◽  
Vol 1 (1) ◽  
Author(s):  
Khreshna Syuhada
Keyword(s):  
At Risk ◽  
Value At Risk ◽  
Risk Measures ◽  
Risk Measure ◽  
Property Value ◽  
Convex Order ◽  
Risk Models ◽  
Aggregate Risk ◽  
Coherent Property ◽  
Future Risk

In financial and insurance industries, risks may come from several sources. It is therefore important to predict future risk by using the concept of aggregate risk. Risk measure prediction plays important role in allocating capital as well as in controlling (and avoiding) worse risk. In this paper, we consider several risk measures such as Value-at-Risk (VaR), Tail VaR (TVaR) and its extension namely Adjusted TVaR (Adj-TVaR). Specifically, we perform an upper bound for such risk measure applied for aggregate risk models. The concept and property of comonotonicity and convex order are utilized to obtain such upper bound.Keywords:        Coherent property, comonotonic rv, convex order, tail property, Value-at-Risk (VaR).

Sign in / Sign up

Export Citation Format

Share Document