Group for Research in Decision Analysis

Data analysis and banking regulation: Risk models and volatility effects

Hassan Omidi Firouzi RBC Royal Bank, Canada

Banks are required to assess and report the risk of the trading book for future periods to their local regulators. Basel Committee on Banking Supervision (BCBS) as an international committee of banking supervisory authorities allows banks to use either the internal models-based approach (IMB) or the standardized approach to assess the risk. Different internal models are used frequently by banks to compute Value at Risk (VaR), and subsequently the minimum capital requirement. In this presentation, we provide some background on Basel Accords (mainly Basel III), and study the effects of misspecification of volatility filtering on the VaR violations clustering under the framework of VaR model validation (backtesting procedure). We provide empirical evidences using equity indices.

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