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Regulatory Evaluation of Value-at-Risk Models, Research Paper 9710

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Regulatory Evaluation of Value-at-Risk Models, Research Paper 9710

DATE: March 1997

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ABSTRACT: Beginning in 1998, commercial banks may determine their regulatory capital requirements for market risk exposure using value-at-risk (VaR) models; i.e., time-series models of the distributions of portfolio returns. Currently, regulators have available three statistical methods for evaluating the accuracy of VaR models: the binomial method, the interval forecast method, and the distribution forecast method. These methods test whether the VaR forecasts in question exhibit properties characteristics of accurate VaR forecasts. However, the statistical tests can have low power against alternative models. A new evaluation method, based on proper scoring rules for probability forecasts, is proposed. Simulation results indicate that this method is clearly capable of differentiating among accurate and alternative VaR models.

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Lopez, Jose A. "Regulatory Evaluation of Value-at-Risk Models, Research Paper 9710," Research Papers (Federal Reserve Bank of New York) (March 1997). https://fraser.stlouisfed.org/title/6570/item/615562, accessed on June 9, 2023.

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THEMES: CLASSIFICATION:
  • jel: C52
  • jel: G2
  • lcc: HG136 .R45 no.9710
IDENTIFIERS:
  • oclc: 36797820
  • repec: fip:fednrp:9710
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