An evaluation of the effectiveness of Value-at-Risk (VaR) models for Australian banks under Basel III

Uylangco, Katherine & Li, Siqiwen (2016) An evaluation of the effectiveness of Value-at-Risk (VaR) models for Australian banks under Basel III. Australian Journal of Management, 41(4), pp. 699-718.

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Abstract

This study compares Value-at-Risk (VaR) measures for Australian banks over a period that includes the Global Financial Crisis (GFC) to determine whether the methodology and parameter selection are important for capital adequacy holdings that will ultimately support a bank in a crisis period. VaR methodology promoted under Basel II was largely criticised during the GFC for its failure to capture downside risk. However, results from this study indicate that 1-year parametric and historical models produce better measures of VaR than models with longer time frames. VaR estimates produced using Monte Carlo simulations show a high percentage of violations but with lower average magnitude of a violation when they occur. VaR estimates produced by the ARMA GARCH model also show a relatively high percentage of violations, however, the average magnitude of a violation is quite low. Our findings support the design of the revised Basel II VaR methodology which has also been adopted under Basel III.

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ID Code: 86546
Item Type: Journal Article
Refereed: Yes
Keywords: Value-at-Risk (VaR), Parametric VaR, Monte carlo simulation, Basel Accords
DOI: 10.1177/0312896214557837
ISSN: 1327-2020
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2015 The Author(s)
Deposited On: 13 Aug 2015 01:09
Last Modified: 19 Dec 2016 04:42

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