An evaluation of the effectiveness of Value at Risk (VaR) models for Australian banks under Basel III

Uylangco, Katherine, and Li, Siqiwen (2013) An evaluation of the effectiveness of Value at Risk (VaR) models for Australian banks under Basel III. In: Papers from the World Finance and Banking Symposium . From: World Finance and Banking Symposium, 16-17 December 2013, Beijing, China.

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Abstract

The Global Financial Crisis triggered a revision of the VaR based Basel II market risk framework to address extreme events. The revised VaR methodology remains unchanged under Basel III, however ongoing studies to evaluate VaR continue in academia and by the Basel Committee. In this paper, we assess VaR models for Australian banks over the past ten years and provide statistical evidence of their effectiveness. Results indicate that one year parametric and historical models produce better measures of VaR than models with longer time frames. VaR estimates produced using Monte Carlo simulations show very low percentage of violations but higher level of violations. VaR estimates produced by the ARMA GARCH model show relatively high percentage of violations, however, the level of violations is quite low. Our findings shed light on the rationale and design of the revised Basel II VaR methodology which has also been adopted under Basel III.

Item ID: 32331
Item Type: Conference Item (Research - E1)
Keywords: Value-at-Risk (VaR), parametric VaR, Monte Carlo simulation, Basel Accords
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Date Deposited: 22 May 2014 03:47
FoR Codes: 15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150205 Investment and Risk Management @ 40%
15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150202 Financial Econometrics @ 30%
15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150203 Financial Institutions (incl Banking) @ 30%
SEO Codes: 90 COMMERCIAL SERVICES AND TOURISM > 9001 Financial Services > 900101 Finance Services @ 50%
90 COMMERCIAL SERVICES AND TOURISM > 9001 Financial Services > 900102 Investment Services (excl. Superannuation) @ 30%
91 ECONOMIC FRAMEWORK > 9101 Macroeconomics > 910109 Savings and Investments @ 20%
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