Bank Capital and Value at Risk

Abstract

5 1 Introduction 7 1.1 Trading risk and the Basle Accord 7 1.2 Additive capital requirements 8 1.3 The Basle alternative approach 9 1.4 Regulatory safeguards 10 1.5 Value-at-risk analysis 11 2 Empirical analysis of VaRs 13 2.1 Trading books 13 2.2 Return data 14 2.3 Parametric VaR analysis 15 2.4 Forecasting performance and window length 16 2.5 Weighting schemes 18 2.6 Parametric versus non-parametric VaRs 19 2.7 The inclusion of estimated means 20 2.8 `Spike' loss periods 21 2.9 Basle alternative approach capital calculations 23 2.10 The Basle approach to back-testing 23 3 Conclusion 24 References 26 Tables 28 Charts 38 Abstract To measure the risks involved in their trading operations, major banks are increasingly employing Value-at-Risk #VaR# models. In an important regulatory innovation, the Basle Committee has proposed that such models be used in the determination of the capital that banks must hold to back their securities trading. This paper examines the empirical performance ...