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Title: Value-at-Risk models and Basel capital charges. Evidence from Emerging and Frontier stock markets
Authors: Rossignolo, Adrian F.
Fethi, Meryem Duygun
Shaban, Mohamed
First Published: 7-Dec-2011
Citation: Journal of Financial Stability, 2012, 8 (4), pp. 303-319
Abstract: In the wake of the subprime crisis of 2007 which uncovered shortfalls in capital levels of most financial institutions, the Basel Committee planned to strengthen current regulations contained in Basel II. While maintaining the Internal Model Approach based on Value-at-Risk, a stressed VaR calculated over highly strung periods is to be added to present directives to constitute Minimum Capital Requirements. Consequently, the adoption of the appropriate VaR specification remains a subject of paramount importance as it determines the financial condition of the firm. In this article I explore the performance of several models to compute MCR in the context of Emerging and Frontier stock markets within the present and proposed capital structures. Considering the evidence gathered, two major contributions arise: (a) heavy-tailed distributions - particularly Extreme Value (EV) ones-, reveal as the most accurate technique to model market risks, hence preventing huge capital deficits under current measures; (b) the application of such methods could allow slight modifications to present mandate and simultaneously avoid sVaR or at least reduce its scope, thus mitigating the impact regarding the enhancement of capital base. Therefore, I suggest that the inclusion of EV in planned supervisory accords should reduce development costs and foster healthier financial structures.
DOI Link: 10.1016/j.jfs.2011.11.003
ISSN: 1572-3089
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: © 2011 Elsevier B.V. All rights reserved. Deposited with reference to the publisher's archiving policy available on the SHERPA/RoMEO website. NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Financial Stability. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Stability, 2012, 8 (4), pp. 303-319, DOI: 10.1016/j.jfs.2011.11.003
Appears in Collections:Published Articles, School of Management

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