Template-type: ReDIF-Paper 1.0
Author-Name: Juan-Ángel Jiménez-Martín
Author-Email: juanangel@ccee.ucm.es
Author-Homepage: https://www.ucm.es/fundamentos-analisis-economico2/jajm
Author-Person: pji27 
Author-Workplace-Name: Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales 
	(Faculty of Economics and Business), Universidad Complutense de Madrid
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Author-Workplace-Homepage: https://www.ucm.es/icae
Author-Name: Michael McAleer
Author-Person: pmc90 
Author-Workplace-Name: Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics)
	Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).
Author-Name: Teodosio Pérez-Amaral
Author-Workplace-Name: Department of Quantitative Economics, Complutense University of Madrid
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Author-Workplace-Homepage: https://www.ucm.es/icae
Title: A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk
Abstract: Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions
	(ADIs) have to communicate their daily risk estimates to the monetary authorities at the
	beginning of the trading day, using a variety of Value-at-Risk (VaR) models to measure
	risk. Sometimes the risk estimates communicated using these models are too high,
	thereby leading to large capital requirements and high capital costs. At other times, the
	risk estimates are too low, leading to excessive violations, so that realised losses are
	above the estimated risk. In this paper we propose a learning strategy that complements
	existing methods for calculating VaR and lowers daily capital requirements, while
	restricting the number of endogenous violations within the Basel II Accord penalty
	limits. We suggest a decision rule that responds to violations in a discrete and
	instantaneous manner, while adapting more slowly in periods of no violations. We
	apply the proposed strategy to Standard & Poor’s 500 Index and show there can be
	substantial savings in daily capital charges, while restricting the number of violations to
	within the Basel II penalty limits.
Classification-JEL: G32, G11, G17, C53.
Keywords: Daily capital charges, endogenous violations, frequency of violations, optimizing strategy, risk forecasts, value-at-risk.
Length: 29 pages
Creation-Date: 2009
Number: 2009-07
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae0907.txt
File-URL: https://eprints.ucm.es/id/eprint/8593/1/0907.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:0907