Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/83476
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- Title
- Model-based stress tests : linking stress tests to VaR for market risk
- Related
- Australasian Finance and Banking Conference (20th : 2007) (12 - 14 December 2007 : Sydney)
- Related
- The 20th Annual Australasian Finance and Banking Conference : conference papers
- Publisher
- 2007
- Date
- 2007
- FoR/RFCD Code(s)
-
350302 Financial Econometrics
150200 Banking, Finance and Investment
- Author/Creator
- Alexander, Carol
- Author/Creator
- Sheedy, Elizabeth
- Description
- Under the new capital accord stress tests are to be included in market risk regulatory capital calculations. This development necessitates a coherent and objective framework for stress testing portfolios exposed to market risk. Following recent criticism of stress testing methods our tests are conducted in the context of risk models, building on the VaR literature. First, to identify the most suitable risk models for stress testing, we apply an extensive back testing procedure that focuses on extreme market movements. We consider eight possible risk models including both conditional and unconditional models and four possible return distributions (normal, Student’s t, empirical and normal mixture) applied to three heavily traded currency pairs using a sample of daily data spanning more than 20 years. Finding that risk models accommodating both volatility clustering and heavy tails are the most accurate predictors of extreme returns, we develop a corresponding model-based stress testing methodology. Our results are compared with traditional stress tests and we assess the implications for capital adequacy. On the basis of our results we conclude that the new recommendations for market risk regulatory capital calculation will have little impact on current levels of foreign exchange regulatory capital.
- Subject Keyword
- 350302 Financial Econometrics
- Subject Keyword
- 150200 Banking, Finance and Investment
- Subject Keyword
- value-at-risk models
- Subject Keyword
- stress testing
- Subject Keyword
- market risk
- Subject Keyword
- exchange rates
- Subject Keyword
- GARCH
- Resource Type
- conference paper
- Organisation
- Macquarie University. Applied Finance Centre
- Identifier
- http://hdl.handle.net/1959.14/83476
- Identifier
- mq-rm-2007000893
- Language
- eng
- Reviewed
