First, the market risk capital figures will provide an accurate indication of the true risk profile of a banking organization only to the extent that the underlying value-at-risk model
In the market risk setting, this concern is addressed through a simple scaling approach, where capital requirements based on a ten-day standard may be calculated with scaled risk estimates based on the one-day horizon that is typical for most value-at-risk models
She also cautioned that value-at-risk models
work very poorly for arbitrage-related businesses, for real estate, and for private equity.
The role of the scaling factor is to translate the value-at-risk estimates into an appropriate minimum capital requirement, reflecting considerations both about the accuracy of a bank's value-at-risk model
and about prudent capital coverage.
The choice of these components by risk managers greatly affects the nature of the value-at-risk model
Evaluating Value-at-Risk Models
with Desk-Level Data", Management Science 57, 2213-2227.
As to value-at-risk models
, we now have inconvertible evidence they are very useful when they don't matter and totally useless when they do matter.
How Accurate are Value-at-Risk Models
at Commercial Banks?
Many value-at-risk models
for measuring market risk require the estimation of volatility parameter.
Jeremy Berkowitz, University of California at Irvine, and James O'Brien, Federal Reserve Board, "How Accurate are Value-at-Risk Models
at Commercial Banks?
In addition, the first inverses, stress tests, value-at-risk models
, limits on complexity model reserves, and enterprisewide VaR systems were created.
The Basle Committee is also working to improve international risk-disclosure practices of banks and has created the new market risk capital standard that is based on banks' internal value-at-risk models
Designed to give banks a single, simple figure of their total risk exposure, Value-at-Risk models
of risk management, known in the industry as VaR, are being challenged by many experts who say too many banks rely on what's become an out-dated, misunderstood and poorly-used method of calculation in a financial market universe that has fundamentally changed since the collapse of (http://www.
International bank supervisors conducted a study of the performance during the market upheaval of banks' risk management systems and the value-at-risk models
used to calculate market risk capital requirements (Basel Committee on Banking Supervision 1999c).
Our integrated tools can provide insights across multiple risk categories, such as dedicated credit models, value-at-risk models
, stress and scenario tests, and exposure analysis," said Ian Castledine, global head of Investment Risk product for Northern Trust.