The banking systems that deal with risk management depend on underlying risk
measures. Following the Basel II accord, there are two separate methods by
which banks may determine their capital requirement. The Value at Risk measure
plays an important role in computing the capital for both approaches. In this
paper we analyze the errors produced by using this measure. We discuss other
measures, demonstrating their strengths and shortcomings. We give examples,
showing the need for the information from multiple risk measures in order to
determine a bank's loss distribution. We conclude by suggesting a regulatory
requirement of multiple risk measures being reported by banks, giving specific
recommendations.Comment: 23 pages, 9 figure

Guégan, Dominique

Tarrant, Wayne

Annals of Finance

English

arXiv

URL des Documents de travail : http://ces.univ-paris1.fr/cesdp/CESFramDP2010.htm  To appear in Annals of FinanceDocuments de travail du Centre d'Economie de la Sorbonne 2010.05 - ISSN : 1955-611XThe banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements.Les systèmes bancaires qui traitent de la gestion des risques dépendent des mesures de risque sous-jacentes. Suite à la recommandation de l'accord de Bâle II, la plupart des banques ont développé des modèles internes pour déterminer leur exigence de capital. Le choix de la mesure du risque joue un rôle important dans le calcul de ce capital. Dans cet article, nous analysons en détail les erreurs produites par l'utilisation d'une mesure en particulier. Nous proposons ensuite d'autres mesures, en soulignant leurs forces et leurs faiblesses. Nous donnons des exemples détaillés, montrant la nécessité de cinq mesures de risque afin de calculer un capital correspondant aux risques auxquels la Banque est exposée. In fine, nous suggérons d'utiliser cinq mesures de risque différentes pour le calcul des exigences en capital

Guegan, Dominique

HAL-Ecole des Ponts ParisTech

On the necessity of five risk measures

A paraître dans Annals of FinanceInternational audienceThe banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements.Les systèmes bancaires qui traitent de la gestion des risques dépendent des mesures de risque sous-jacentes. Suite à la recommandation de l'accord de Bâle II, la plupart des banques ont développé des modèles internes pour déterminer leur exigence de capital. Le choix de la mesure du risque joue un rôle important dans le calcul de ce capital. Dans cet article, nous analysons en détail les erreurs produites par l'utilisation d'une mesure en particulier. Nous proposons ensuite d'autres mesures, en soulignant leurs forces et leurs faiblesses. Nous donnons des exemples détaillés, montrant la nécessité de cinq mesures de risque afin de calculer un capital correspondant aux risques auxquels la Banque est exposée. In fine, nous suggérons d'utiliser cinq mesures de risque différentes pour le calcul des exigences en capital

HAL-Paris1

On the Necessity of Five Risk Measures

Archive Ouverte a LUniversite Lyon 2

Abstract: The banking systems that deal with risk management depend on un-derlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by the use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end we suggest using five different risk measures for computing capital requirements

On the Necessity of Five Risk Measures

Abstract

Similar works

Full text

Available Versions

HAL-Ecole des Ponts ParisTech

HAL-Paris1

Archive Ouverte a LUniversite Lyon 2

HAL-Paris1

HAL-Ecole des Ponts ParisTech

CiteSeerX

Archive Ouverte a LUniversite Lyon 2

HAL: Hyper Article en Ligne