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

Katherine Uylangco, Siqiwen LI

Research output: Contribution to journalArticle

2 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)1-20
Number of pages20
JournalAustralian Journal of Management
Volume1
DOIs
Publication statusPublished - 2015
Externally publishedYes

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Risk model
Value at risk
Basel
Evaluation
Violations
Methodology
Global financial crisis
Basel II
GARCH model
Capital adequacy
Risk measures
Autoregressive moving average
Monte Carlo simulation
Downside risk

Cite this

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An evaluation of the effectiveness of Value-at-Risk (VaR) models for Australian banks under Basel III. / Uylangco, Katherine; LI, Siqiwen.

In: Australian Journal of Management, Vol. 1, 2015, p. 1-20.

Research output: Contribution to journalArticle

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