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Measuring market risk using extreme value theory
Company: University of the Philippines
Year Of Publication: 2009
Month Of Publication: December
Pages: 28
Download Count: 24
View Count: 1797
Comment Num: 0
Language: English
Who Can Read: Free
Date: 4-2-2010
Publisher: Administrator
Summary
The adoption of Basel II standards by the Bangko Sentral ng Pilipinas initiates financial institutions to develop value-at-risk (VaR) models to measure market risk. In this paper, two VaR models are considered using the peaks-over-threshold (POT) approach of the extreme value theory: (1) static EVT model which is the straightforward application of POT to the bond benchmark rates; and (2) dynamic EVT model which applies POT to the residuals of the fitted AR-GARCH model. The results are compared with traditional VaR methods such as RiskMetrics and AR-GARCH-type models. The relative size, accuracy and efficiency of the models are assessed using mean relative bias, backtesting, likelihood ratio tests, loss function, mean relative scaled bias and computation of market risk charge. Findings show that the dynamic EVT model can capture market risk conservatively, accurately and efficiently. It is also practical to use because it has the potential to lower a bank’s capital requirements. Compar
Author(s)
Suaiso, Oliver Q. Sign in to follow this author
Mapa, Dennis S. Sign in to follow this author
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