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

Uylangco, Katherine, and Li, Siqiwen (2016) An evaluation of the effectiveness of Value-at-Risk (VaR) models for Australian banks under Basel III. Australian Journal of Management, 41 (4). pp. 699-718.

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Abstract

This study compares Value-at-Risk (VaR) measures for Australian banks over a period that includes the Global Financial Crisis (GFC) to determine whether the methodology and parameter selection are important for capital adequacy holdings that will ultimately support a bank in a crisis period. VaR methodology promoted under Basel II was largely criticised during the GFC for its failure to capture downside risk. However, results from this study indicate that 1-year parametric and historical models produce better measures of VaR than models with longer time frames. VaR estimates produced using Monte Carlo simulations show a high percentage of violations but with lower average magnitude of a violation when they occur. VaR estimates produced by the ARMA GARCH model also show a relatively high percentage of violations, however, the average magnitude of a violation is quite low. Our findings support the design of the revised Basel II VaR methodology which has also been adopted under Basel III.

Item ID: 49142
Item Type: Article (Scholarly Work)
ISSN: 1327-2020
Keywords: Basel Accords; Monte Carlo simulation; parametric VaR; Value-at-Risk (VaR)
Date Deposited: 22 Sep 2017 00:46
FoR Codes: 14 ECONOMICS > 1402 Applied Economics > 140207 Financial Economics @ 100%
SEO Codes: 91 ECONOMIC FRAMEWORK > 9199 Other Economic Framework > 919999 Economic Framework not elsewhere classified @ 100%
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