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Do Banks Overstate Their Value-at-Risk?
Company: Simon Fraser University
Year Of Publication: 2006
Month Of Publication: September
Pages: 41
Download Count: 486
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 11-26-2006
Publisher: Administrator
Summary
This paper is the first empirical study of banks’ risk management systems based on nonanonymousValue-at-Risk (VaR) and profit-and-loss data. Using actual data from the sixlargest Canadian commercial banks, we uncover evidence that banks exhibit a systematicexcess of conservatism in their VaR estimates. Out of the 7,354 trading days analyzed inthis study, there are only two exceptions, i.e., days when the actual loss exceeds thedisclosed VaR, whereas the expected number of exceptions with a 99% VaR is 74. Foreach sample bank, we extract from historical VaRs a risk-overstatement coefficient,ranging between 19% and 79%. We attribute VaR overstatement to several factors,including extreme cautiousness and underestimation of diversification effects whenaggregating VaRs across business lines and/or risk categories. We also discuss the cost ofreporting inflated VaRs in terms of regulatory capital
Author(s)
Perignon, Christophe Sign in to follow this author
Deng, Zi Yin Sign in to follow this author
Wang, Zhi Jun Sign in to follow this author
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