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Risk management of risk under the Basel Accord: forecasting value‐at‐risk of VIX futures

Chia‐lin Chang (Department of Applied Economics and Department of Finance, National Chung Hsing University, Taichung, Taiwan)
Juan‐Ángel Jiménez‐Martín (Department of Quantitative Economics, Complutense, University of Madrid, Madrid, Spain)
Michael McAleer (Erasmus School of Economics, Econometric Institute, Erasmus University Rotterdam, Rotterdam, The Netherlands, Tinbergen Institute, Rotterdam, The Netherlands, Institute of Economic Research, Kyoto University, Kyoto, Japan and Department of Quantitative Economics, Complutense University of Madrid, Madrid, Spain)
Teodosio Pérez‐Amaral (Department of Quantitative Economics, Complutense, University of Madrid, Madrid, Spain)

Managerial Finance

ISSN: 0307-4358

Article publication date: 27 September 2011

Abstract

Purpose

The Basel II Accord requires that banks and other authorized deposit‐taking institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure value‐at‐risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realized losses exceed the estimated VaR. The purpose of this paper is to address the question of risk management of risk, namely VaR of VIX futures prices.

Design/methodology/approach

The authors examine how different risk management strategies performed before, during and after the 2008‐2009 global financial crisis (GFC).

Findings

The authors find that an aggressive strategy of choosing the supremum of the univariate model forecasts is preferred to the other alternatives, and is robust during the GFC.

Originality/value

The paper examines how different risk management strategies performed before, during and after the 2008‐2009 GFC, and finds that an aggressive strategy of choosing the supremum of the univariate model forecasts is preferred to the other alternatives, and is robust during the GFC.

Keywords

Citation

Chang, C., Jiménez‐Martín, J., McAleer, M. and Pérez‐Amaral, T. (2011), "Risk management of risk under the Basel Accord: forecasting value‐at‐risk of VIX futures", Managerial Finance, Vol. 37 No. 11, pp. 1088-1106. https://doi.org/10.1108/03074351111167956

Publisher

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Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited