It Pays to Violate: How Effective are the Basel Accord Penalties?

The internal models amendment to the Basel Accord allows banks to use internal models to forecast Value-at-Risk (VaR) thresholds, which are used to calculate the required capital that banks must hold in reserve as a protection against negative changes in the value of their trading portfolios. As capital reserves lead to an opportunity cost to banks, it is likely that banks could be tempted to use models that underpredict risk, and hence lead to low capital charges. In order to avoid this problem the Basel Accord introduced a backtesting procedure, whereby banks using models that led to excessive violations are penalised through higher capital charges. This paper investigates the performance of five popular volatility models that can be used to forecast VaR thresholds under a variety of distributional assumptions. The results suggest that, within the current constraints and the penalty structure of the Basel Accord, the lowest capital charges arise when using models that lead to excessive violations, thereby suggesting the current penalty structure is not severe enough to control risk management. In addition, this paper suggests an alternative penalty structure that is more effective at aligning the interests of banks and regulators.GARCH;risk management;forecasting;Value-at-Risk (VaR);Basel accord penalties;simulations;violations

Serendipity Face and Edge VEM Spaces

We extend the basic idea of Serendipity Virtual Elements from the previous case (by the same authors) of nodal ($H^1$-conforming) elements, to a more general framework. Then we apply the general strategy to the case of $H(div)$ and $H(curl)$ conforming Virtual Element Methods, in two and three dimensions

Lowest order Virtual Element approximation of magnetostatic problems

We give here a simplified presentation of the lowest order Serendipity Virtual Element method, and show its use for the numerical solution of linear magneto-static problems in three dimensions. The method can be applied to very general decompositions of the computational domain (as is natural for Virtual Element Methods) and uses as unknowns the (constant) tangential component of the magnetic field $\mathbf{H}$ on each edge, and the vertex values of the Lagrange multiplier $p$ (used to enforce the solenoidality of the magnetic induction $\mathbf{B}=\mu\mathbf{H}$). In this respect the method can be seen as the natural generalization of the lowest order Edge Finite Element Method (the so-called "first kind N\'ed\'elec" elements) to polyhedra of almost arbitrary shape, and as we show on some numerical examples it exhibits very good accuracy (for being a lowest order element) and excellent robustness with respect to distortions