Measuring Event Risk
(2009) In Journal of Financial Econometrics 7(3). p.265-287- Abstract
- 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... (More) - 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. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/1388508
- author
- Vilhelmsson, Anders LU and Nyberg, Peter
- organization
- publishing date
- 2009
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- Value-at-Risk, Jumps
- in
- Journal of Financial Econometrics
- volume
- 7
- issue
- 3
- pages
- 265 - 287
- publisher
- Oxford University Press
- external identifiers
-
- wos:000267441400004
- scopus:67650142104
- ISSN
- 1479-8409
- DOI
- 10.1093/jjfinec/nbp003
- language
- English
- LU publication?
- yes
- id
- 890fcc30-d843-43fb-ab80-893e69b72a81 (old id 1388508)
- date added to LUP
- 2016-04-01 11:59:53
- date last changed
- 2022-01-26 21:17:23
@article{890fcc30-d843-43fb-ab80-893e69b72a81,
abstract = {{This paper decomposes the popular risk measure Value-at-Risk (VaR) into<br/><br>
one jump- and one continuous component. The continuous component corresponds<br/><br>
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<br/><br>
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.}},
author = {{Vilhelmsson, Anders and Nyberg, Peter}},
issn = {{1479-8409}},
keywords = {{Value-at-Risk; Jumps}},
language = {{eng}},
number = {{3}},
pages = {{265--287}},
publisher = {{Oxford University Press}},
series = {{Journal of Financial Econometrics}},
title = {{Measuring Event Risk}},
url = {{http://dx.doi.org/10.1093/jjfinec/nbp003}},
doi = {{10.1093/jjfinec/nbp003}},
volume = {{7}},
year = {{2009}},
}