A word of caution on calculating market-based minimum capital risk requirements
This paper demonstrates that the use of GARCH-type models for the calculation of minimum capital risk requirements (MCRRs) may lead to the production of inaccurate and therefore inefficient capital requirements. We show that this inaccuracy stems from the fact that GARCH models typically overstate t...
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| Veröffentlicht in: | Journal of banking & finance 2000-10, Vol.24 (10), p.1557-1574 |
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| container_title | Journal of banking & finance |
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| creator | Brooks, C Clare, A.D Persand, G |
| description | This paper demonstrates that the use of GARCH-type models for the calculation of minimum capital risk requirements (MCRRs) may lead to the production of inaccurate and therefore inefficient capital requirements. We show that this inaccuracy stems from the fact that GARCH models typically overstate the degree of persistence in return volatility. A simple modification to the model is found to improve the accuracy of MCRR estimates in both back- and out-of-sample tests. Given that internal risk management models are currently in widespread usage in some parts of the world (most notably the USA), and will soon be permitted for EC banks and investment firms, we believe that our paper should serve as a valuable caution to risk management practitioners who are using, or intend to use this popular class of models. |
| doi_str_mv | 10.1016/S0378-4266(99)00092-8 |
| format | Article |
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Given that internal risk management models are currently in widespread usage in some parts of the world (most notably the USA), and will soon be permitted for EC banks and investment firms, we believe that our paper should serve as a valuable caution to risk management practitioners who are using, or intend to use this popular class of models.</description><subject>Capital requirements</subject><subject>Economic models</subject><subject>Financial institutions</subject><subject>Internal risk management models</subject><subject>Minimum capital risk requirements</subject><subject>Risk management</subject><subject>Stochastic models</subject><subject>Studies</subject><subject>Volatility</subject><subject>Volatility persistence</subject><issn>0378-4266</issn><issn>1872-6372</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2000</creationdate><recordtype>article</recordtype><sourceid>X2L</sourceid><recordid>eNqFkElLxTAUhYMo-Bx-glBc6aKaqRlWIuIEigt1HdL0VvN8HUxSxX9v6hO3QpJ7FuecJB9CBwSfEEzE6SNmUpWcCnGk9THGWNNSbaAFUZKWgkm6iRZ_lm20E-Mym7AibIEezovPITTF0BbOTskPfZGXsys3rWzy_UvR2fAGqaxthKbofO-7qcuG0Se7KoKPb0WA98kH6KBPcQ9ttXYVYf937qLnq8uni5vy7uH69uL8rnQVYamkStDaSl0RKZkgrOGuUlSS2nHgnNeyBou5EHVDGG20UDUIhwUF2lpc4ZbtosN17xiG9wliMsthCn2-0hDNNZVMsWyq1iYXhhgDtGYMPv_nyxBsZnTmB52ZuRitzQ86o3Lufp0LMIL7CwHAsm59b82HYZbyfHzNIsfy8HmTWYyzqCppSCW5eU1d7jtb90Em8uEhmOg89A6ajM0l0wz-nxd9A5F9jv8</recordid><startdate>20001001</startdate><enddate>20001001</enddate><creator>Brooks, C</creator><creator>Clare, A.D</creator><creator>Persand, G</creator><general>Elsevier B.V</general><general>Elsevier</general><general>Elsevier Sequoia S.A</general><scope>DKI</scope><scope>X2L</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope></search><sort><creationdate>20001001</creationdate><title>A word of caution on calculating market-based minimum capital risk requirements</title><author>Brooks, C ; Clare, A.D ; Persand, G</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c513t-2862ba7951773613d4c58271bc4e444b7bea0466bd132d968be6c062e2fa050f3</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2000</creationdate><topic>Capital requirements</topic><topic>Economic models</topic><topic>Financial institutions</topic><topic>Internal risk management models</topic><topic>Minimum capital risk requirements</topic><topic>Risk management</topic><topic>Stochastic models</topic><topic>Studies</topic><topic>Volatility</topic><topic>Volatility persistence</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Brooks, C</creatorcontrib><creatorcontrib>Clare, A.D</creatorcontrib><creatorcontrib>Persand, G</creatorcontrib><collection>RePEc IDEAS</collection><collection>RePEc</collection><collection>CrossRef</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><jtitle>Journal of banking & finance</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Brooks, C</au><au>Clare, A.D</au><au>Persand, G</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>A word of caution on calculating market-based minimum capital risk requirements</atitle><jtitle>Journal of banking & finance</jtitle><date>2000-10-01</date><risdate>2000</risdate><volume>24</volume><issue>10</issue><spage>1557</spage><epage>1574</epage><pages>1557-1574</pages><issn>0378-4266</issn><eissn>1872-6372</eissn><coden>JBFIDO</coden><abstract>This paper demonstrates that the use of GARCH-type models for the calculation of minimum capital risk requirements (MCRRs) may lead to the production of inaccurate and therefore inefficient capital requirements. 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| ispartof | Journal of banking & finance, 2000-10, Vol.24 (10), p.1557-1574 |
| issn | 0378-4266 1872-6372 |
| language | eng |
| recordid | cdi_proquest_journals_194927383 |
| source | RePEc; Elsevier ScienceDirect Journals |
| subjects | Capital requirements Economic models Financial institutions Internal risk management models Minimum capital risk requirements Risk management Stochastic models Studies Volatility Volatility persistence |
| title | A word of caution on calculating market-based minimum capital risk requirements |
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