What Happened to Risk Management During the 2008-09 Financial Crisis?

When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor’s 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits.risk management;violations;conservative risk strategy;aggressive risk strategy;value-at-risk forecast

GFC-Robust Risk Management Strategies under the Basel Accord

A risk management strategy is proposed as being robust to the Global Financial Crisis (GFC) by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. This risk management strategy is GFC-robust in the sense that maintaining the same risk management strategies before, during and after a financial crisis would lead to comparatively low daily capital charges and violation penalties. The new method is illustrated by using the S&P500 index before, during and after the 2008-09 global financial crisis. 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. The median VaR risk management strategy is GFC-robust as it provides stable results across different periods relative to other VaR forecasting models. The new strategy based on combined forecasts of single models is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.Value-at-Risk (VaR);daily capital charges;optimizing strategy;robust forecasts;violation penalties;global financial crisis;Basel II Accord;aggressive risk management strategy;conservative risk management strategy

A decision rule to minimize daily capital charges in forecasting value-at-risk

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.value-at-risk;daily capital charges;optimizing strategy;risk forecasts;endogenous violations;frequency of violations

Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures

It is well known that the Basel II Accord requires banks and other Authorized Deposit-taking Institutions (ADIs) to communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models, whether individually or as combinations, 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 realised losses exceed the estimated VaR. Previous papers proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper, using Bayesian and non-Bayesian combinations of models addresses the question of risk management of risk, namely VaR of VIX futures prices, and extends the approaches given in previous papers to examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). The use of time-varying weights using Bayesian methods, allows dynamic combinations of the different models to obtain a more accurate VaR forecasts than the estimates and forecasts that might be produced by a single model of risk. One of these dynamic combinations are endogenously determined by the pass performance in terms of daily capital charges of the individual models. This can improve the strategies to minimize daily capital charges, which is a central objective of ADIs. The empirical results suggest that an aggressive strategy of choosing the Supremum of single model forecasts, as compared with Bayesian and non-Bayesian combinations of models, is preferred to other alternatives, and is robust during the GFC

Cosmology of the Lifshitz universe

We study the ultraviolet complete non-relativistic theory recently proposed by Horava. After introducing a Lifshitz scalar for a general background, we analyze the cosmology of the model in Lorentzian and Euclidean signature. Vacuum solutions are found and it is argued the existence of non-singular bouncing profiles. We find a general qualitative agreement with both the picture of Causal Dynamical Triangulations and Quantum Einstein Gravity. However, inflation driven by a Lifshitz scalar field on a classical background might not produce a scale-invariant spectrum when the principle of detailed balance is assumed.Comment: 23 pages. v2: one reference and one equation added, main conclusions unchanged; v3: matches published version, discussion improved, typos correcte

ESMO Clinical Research Observatory (ECRO): improving the efficiency of clinical research through rationalisation of bureaucracy

During the last years, there has been a dramatic increase in the administrative and bureaucratic burden associated with cli

Genome sequencing of the extinct Eurasian wild aurochs, Bos primigenius, illuminates the phylogeography and evolution of cattle

Background Domestication of the now-extinct wild aurochs, Bos primigenius, gave rise to the two major domestic extant cattle taxa, B. taurus and B. indicus. While previous genetic studies have shed some light on the evolutionary relationships between European aurochs and modern cattle, important questions remain unanswered, including the phylogenetic status of aurochs, whether gene flow from aurochs into early domestic populations occurred, and which genomic regions were subject to selection processes during and after domestication. Here, we address these questions using whole-genome sequencing data generated from an approximately 6,750-year-old British aurochs bone and genome sequence data from 81 additional cattle plus genome-wide single nucleotide polymorphism data from a diverse panel of 1,225 modern animals. Results Phylogenomic analyses place the aurochs as a distinct outgroup to the domestic B. taurus lineage, supporting the predominant Near Eastern origin of European cattle. Conversely, traditional British and Irish breeds share more genetic variants with this aurochs specimen than other European populations, supporting localized gene flow from aurochs into the ancestors of modern British and Irish cattle, perhaps through purposeful restocking by early herders in Britain. Finally, the functions of genes showing evidence for positive selection in B. taurus are enriched for neurobiology, growth, metabolism and immunobiology, suggesting that these biological processes have been important in the domestication of cattle. Conclusions This work provides important new information regarding the origins and functional evolution of modern cattle, revealing that the interface between early European domestic populations and wild aurochs was significantly more complex than previously thought

Single hadron response measurement and calorimeter jet energy scale uncertainty with the ATLAS detector at the LHC

The uncertainty on the calorimeter energy response to jets of particles is derived for the ATLAS experiment at the Large Hadron Collider (LHC). First, the calorimeter response to single isolated charged hadrons is measured and compared to the Monte Carlo simulation using proton-proton collisions at centre-of-mass energies of sqrt(s) = 900 GeV and 7 TeV collected during 2009 and 2010. Then, using the decay of K_s and Lambda particles, the calorimeter response to specific types of particles (positively and negatively charged pions, protons, and anti-protons) is measured and compared to the Monte Carlo predictions. Finally, the jet energy scale uncertainty is determined by propagating the response uncertainty for single charged and neutral particles to jets. The response uncertainty is 2-5% for central isolated hadrons and 1-3% for the final calorimeter jet energy scale.Comment: 24 pages plus author list (36 pages total), 23 figures, 1 table, submitted to European Physical Journal