# 13-070/III (2013-05-21)

Juan-Angel Jimenez-Martin, Complutense University of Madrid, Spain; Michael McAleer, Complutense University of Madrid, Spain, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands, and Kyoto University, Japan; Teodosio Perez Amaral, Complutense University of Madrid, Spain; Paulo Araujo Santos, University of Lisbon, Portugal
Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis
JEL codes:
G32, G11, G17, C53, C22

See the publication in Mathematics and Computers in Simulation (MATCOM) (2013). Volume 94(C), pages 223-237.

In this paper we provide further evidence on the suitability of the median of the point VaR forecasts of a set of models as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.