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THE TEN COMMANDMENTS FOR MANAGING VALUE AT RISK UNDER THE BASEL II ACCORD
Author(s) -
JiménezMartín JuanÁngel,
McAleer Michael,
PérezAmaral Teodosio
Publication year - 2009
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/j.1467-6419.2009.00590.x
Subject(s) - basel ii , economics , operational risk , actuarial science , value at risk , value (mathematics) , basel i , risk weighted asset , risk management , capital requirement , mathematics , finance , microeconomics , statistics , profit (economics) , capital formation , financial capital , incentive
Under the Basel II Accord, banks and other authorized deposit‐taking institutions are required to communicate their daily market risk estimates to the relevant national monetary authority at the beginning of each trading day, using one of a variety of value‐at‐risk (VaR) models to measure risk. The purpose of this paper is to provide a simple explanation and a set of prescriptions for managing VaR under the Basel II Accord. The commandments deal with understanding the Basel II colours, understanding the risk model before choosing, varying the choice of risk model, avoiding the green zone and being willing to violate, incurring large violations, stopping before the red zone, avoiding frequent violations, avoiding the estimation of large portfolios, aggregating portfolios into a single index and interpreting commandments sensibly as guidelines.