Comparison of Methods for Calculation of Capital Adequacy for Market Risk - Value at Risk
|Author:||Mgr. Dan Hojdar|
|Year:||2000 - winter|
|Leaders:|| † prof. Ing. Michal Mejstřík CSc.
|Work type:|| Finance and Banking
|Awards and prizes:|
|Abstract:||This paper deals with statistical methods for calculation of potential loss of an investment portfolio on specific time interval. These methods are known as Value at Risk (VaR). We go in detail through two methods commonly used in practice: Variance-Covariance (VC) and Historical Simulation (HS). In case of VC we compare 'static' exponential weighting suggested by benchmark RiskMetrics document from JP Morgan with weighting dependent on a portfolio composition. Next we demonstrate different behaviour of VC and HS on hypothetical portfolios dependant on risk factor of exchange rate only.
The paper also compares VaR methods with the standardised method (SM) published by BIS in 1996. It also analyses technical shortcomings in a directive introducing SM into the Czech banking system.