Measuring Event Risk
Author
Summary, in English
This paper decomposes the popular risk measure Value-at-Risk (VaR) into
one jump- and one continuous component. The continuous component corresponds
to general market risk and the jump component is proportional to the event risk as defined in the Basel II accord. We find that event risk, which
is currently not incorporated into most banks’ VaR models, comprises a substantial part of total VaR. It constitutes 30% of the risk for a portfolio of small cap stocks but less than 1% for a portfolio of large cap stocks. The national supervising agency in each membership country is advised by the Basel rules to add an additional capital charge to a bank whose models do not capture event risk. The large variation in event risk, also found across 10 individual stocks, suggests that an approach that varies the capital surcharge, based on the type of asset, should be used by the supervisors.
one jump- and one continuous component. The continuous component corresponds
to general market risk and the jump component is proportional to the event risk as defined in the Basel II accord. We find that event risk, which
is currently not incorporated into most banks’ VaR models, comprises a substantial part of total VaR. It constitutes 30% of the risk for a portfolio of small cap stocks but less than 1% for a portfolio of large cap stocks. The national supervising agency in each membership country is advised by the Basel rules to add an additional capital charge to a bank whose models do not capture event risk. The large variation in event risk, also found across 10 individual stocks, suggests that an approach that varies the capital surcharge, based on the type of asset, should be used by the supervisors.
Department/s
Publishing year
2009
Language
English
Pages
265-287
Publication/Series
Journal of Financial Econometrics
Volume
7
Issue
3
Document type
Journal article
Publisher
Oxford University Press
Topic
- Economics
Keywords
- Value-at-Risk
- Jumps
Status
Published
ISBN/ISSN/Other
- ISSN: 1479-8409