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The Implementation of Value at Risk (VaR) in Israels Banking System
Company: Bank Israel Banking Review
Year Of Publication: 1999
Month Of Publication: December
Pages: 61-87
Download Count: 1194
View Count: 3120
Comment Num: 0
Language: EN
Source: article
Who Can Read: Free
Date: 8-25-2002
Publisher: Administrator
The three most commonly used methods for calculating the VaR (Value at Risk) of a typical trading book in Israel’s major banks were examined in this study. An analysis of risk factors in Israel shows that the daily changes are not distributed normally, inter alia because of Israel’s special characteristics: high inflation, indexation, a thin market, and an exchange rate in a band with a positive slope. A comparison of the three most common methods for calculating VaR showed that the capital requirements obtained from the calculations based on the historical and the Monte Carlo simulations, which are not parametric, were smaller than those derived from the calculation based on the variance-covariance method. When accounting for drift (which was found to be positive in the sample period) in the calculation of the latter, the results for all three methods are very similar, however. We also examined three ways of calculating the daily changes in the risk factors: multiplicative (the rate of change), which is appropriate mainly for share indices and exchange rates, additive (absolute change), which is more suitable for interest rates, and a mixed approach, combining the first two in accordance with the risk factor. Our examination indicated that the multiplicative method is far more volatile than the additive and mixed methods, irrespective of the way VaR is calculated Our main conclusion is that choosing the appropriate way of calculating daily changes is at least as important as
Schreiber, B. Z. Sign in to follow this author
Wiener, Zvi Sign in to follow this author
Zakin, D. Sign in to follow this author
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