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Measuring Event Risk

Vilhelmsson, Anders LU and Nyberg, Peter (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:
author
organization
publishing date
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
2009-04-20 12:27:31
date last changed
2017-01-29 03:28:52
@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},
  keyword      = {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},
  volume       = {7},
  year         = {2009},
}