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Measuring Event Risk

In English

Författare

Summary, in English

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.

Publiceringsår

2009

Språk

Engelska

Sidor

265-287

Publikation/Tidskrift/Serie

Journal of Financial Econometrics

Volym

7

Issue

3

Dokumenttyp

Artikel i tidskrift

Förlag

Oxford University Press

Ämne

  • Economics

Nyckelord

  • Value-at-Risk
  • Jumps

Status

Published

ISBN/ISSN/Övrigt

  • ISSN: 1479-8409