Post by Sapphire Capital on Sept 5, 2008 3:37:04 GMT 4
Measuring Event Risk
Peter M. Nyberg
Swedish School of Economics and Business Administration - Department of Finance and Statistics
Anders Wilhelmsson
Lund University - Department of Economics
August 25, 2008
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 around 1/3 of the risk for a portfolio of small cap stocks but only 0.5% 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, which we also find 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
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1253782_code341113.pdf?abstractid=1253782&mirid=3
Peter M. Nyberg
Swedish School of Economics and Business Administration - Department of Finance and Statistics
Anders Wilhelmsson
Lund University - Department of Economics
August 25, 2008
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 around 1/3 of the risk for a portfolio of small cap stocks but only 0.5% 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, which we also find 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
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1253782_code341113.pdf?abstractid=1253782&mirid=3