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Alternative Methods for Value-at-Risk Estimation: A Study from a Regulatory Perspective Focused on the Swedish Market
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.).
2014 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Alternativa metoder för beräkning av Value-at-Risk : En studie från ett regelverksperspektiv med fokus på den svenska marknaden (Swedish)
Abstract [en]

The importance of sound financial risk management has become increasingly emphasised in recent years, especially with the financial crisis of 2007-08. The Basel Committee sets the international standards and regulations for banks and financial institutions, and in particular under market risk, they prescribe the internal application of the measure Value-at-Risk. However, the most established non-parametric Value-at-Risk model, historical simulation, has been criticised for some of its unrealistic assumptions. This thesis investigates alternative approaches for estimating non-parametric Value-at-Risk, by examining and comparing the capability of three counterbalancing weighting methodologies for historical simulation: an exponentially decreasing time weighting approach, a volatility updating method and, lastly, a more general weighting approach that enables the specification of central moments of a return distribution. With real financial data, the models are evaluated from a performance based perspective, in terms of accuracy and capital efficiency, but also in terms of their regulatory suitability, with a particular focus on the Swedish market. The empirical study shows that the capability of historical simulation is improved significantly, from both performance perspectives, by the implementation of a weighting methodology. Furthermore, the results predominantly indicate that the volatility updating model with a 500-day historical observation window is the most adequate weighting methodology, in all incorporated aspects. The findings of this paper offer significant input both to existing research on Value-at-Risk as well as to the quality of the internal market risk management of banks and financial institutions.

Abstract [sv]

Betydelsen av sund finansiell riskhantering har blivit alltmer betonad på senare år, i synnerhet i och med finanskrisen 2007-08. Baselkommittén fastställer internationella normer och regler för banker och finansiella institutioner, och särskilt under marknadsrisk föreskriver de intern tillämpning av måttet Value-at-Risk. Däremot har den mest etablerade icke-parametriska Value-at-Risk-modellen, historisk simulering, kritiserats för några av dess orealistiska antaganden. Denna avhandling undersöker alternativa metoder för att beräkna icke-parametrisk Value-at‑Risk, genom att granska och jämföra prestationsförmågan hos tre motverkande viktningsmetoder för historisk simulering: en exponentiellt avtagande tidsviktningsteknik, en volatilitetsuppdateringsmetod, och slutligen ett mer generellt tillvägagångssätt för viktning som möjliggör specifikation av en avkastningsfördelnings centralmoment. Modellerna utvärderas med verklig finansiell data ur ett prestationsbaserat perspektiv, utifrån precision och kapitaleffektivitet, men också med avseende på deras lämplighet i förhållande till existerande regelverk, med särskilt fokus på den svenska marknaden. Den empiriska studien visar att prestandan hos historisk simulering förbättras avsevärt, från båda prestationsperspektiven, genom införandet av en viktningsmetod. Dessutom pekar resultaten i huvudsak på att volatilitetsuppdateringsmodellen med ett 500 dagars observationsfönster är den mest användbara viktningsmetoden i alla berörda aspekter. Slutsatserna i denna uppsats bidrar i väsentlig grad både till befintlig forskning om Value-at-Risk, liksom till kvaliteten på bankers och finansiella institutioners interna hantering av marknadsrisk.

Place, publisher, year, edition, pages
2014. , 95 p.
Series
Examensarbete INDEK, 2014:35
Keyword [en]
Basel Accords, market risk, Value-at-Risk, non-parametric model, historical simulation, weighting of observations, backtesting
Keyword [sv]
Baselregelverket, marknadsrisk, Value-at-Risk, icke-parametrisk modell, historisk simulering, vägning av observationer, backtesting
National Category
Mathematical Analysis
Identifiers
URN: urn:nbn:se:kth:diva-146217OAI: oai:DiVA.org:kth-146217DiVA: diva2:723646
Subject / course
Finance
Educational program
Master of Science in Engineering - Industrial Engineering and Management
Supervisors
Examiners
Available from: 2014-06-19 Created: 2014-06-09 Last updated: 2014-10-07Bibliographically approved

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