An analysis of VaR-based capital requirements

Domenico Cuoco; Hong Liu

doi:10.1016/j.jfi.2005.07.001

An analysis of VaR-based capital requirements

Domenico Cuoco
, Hong Liu

Research output: Contribution to journal › Article › peer-review

54 Scopus citations

Abstract

We study the behavior of a financial institution subject to capital requirements based on self-reported VaR measures, as in the Basel Committee's Internal Models Approach. We view these capital requirements and the associated backtesting procedure as a mechanism designed to induce financial institutions to reveal the risk of their investments and to support this risk with adequate levels of capital. Accordingly, we consider the simultaneous choice of an optimal dynamic reporting and investment strategy. Overall, we find that VaR-based capital requirements can be very effective not only in curbing portfolio risk but also in inducing revelation of this risk.

Original language	English
Pages (from-to)	362-394
Number of pages	33
Journal	Journal of Financial Intermediation
Volume	15
Issue number	3
DOIs	https://doi.org/10.1016/j.jfi.2005.07.001
State	Published - Jul 2006

Keywords

Banking regulation
Basel Capital Accord
Capital requirements
Internal Models Approach
Portfolio constraints
Value-at-Risk

Access to Document

10.1016/j.jfi.2005.07.001

Cite this

@article{0ddda415e6dc467292995d5fad4a651a,

title = "An analysis of VaR-based capital requirements",

abstract = "We study the behavior of a financial institution subject to capital requirements based on self-reported VaR measures, as in the Basel Committee's Internal Models Approach. We view these capital requirements and the associated backtesting procedure as a mechanism designed to induce financial institutions to reveal the risk of their investments and to support this risk with adequate levels of capital. Accordingly, we consider the simultaneous choice of an optimal dynamic reporting and investment strategy. Overall, we find that VaR-based capital requirements can be very effective not only in curbing portfolio risk but also in inducing revelation of this risk.",

keywords = "Banking regulation, Basel Capital Accord, Capital requirements, Internal Models Approach, Portfolio constraints, Value-at-Risk",

author = "Domenico Cuoco and Hong Liu",

year = "2006",

month = jul,

doi = "10.1016/j.jfi.2005.07.001",

language = "English",

volume = "15",

pages = "362--394",

journal = "Journal of Financial Intermediation",

issn = "1042-9573",

number = "3",

}

TY - JOUR

T1 - An analysis of VaR-based capital requirements

AU - Cuoco, Domenico

AU - Liu, Hong

PY - 2006/7

Y1 - 2006/7

N2 - We study the behavior of a financial institution subject to capital requirements based on self-reported VaR measures, as in the Basel Committee's Internal Models Approach. We view these capital requirements and the associated backtesting procedure as a mechanism designed to induce financial institutions to reveal the risk of their investments and to support this risk with adequate levels of capital. Accordingly, we consider the simultaneous choice of an optimal dynamic reporting and investment strategy. Overall, we find that VaR-based capital requirements can be very effective not only in curbing portfolio risk but also in inducing revelation of this risk.

AB - We study the behavior of a financial institution subject to capital requirements based on self-reported VaR measures, as in the Basel Committee's Internal Models Approach. We view these capital requirements and the associated backtesting procedure as a mechanism designed to induce financial institutions to reveal the risk of their investments and to support this risk with adequate levels of capital. Accordingly, we consider the simultaneous choice of an optimal dynamic reporting and investment strategy. Overall, we find that VaR-based capital requirements can be very effective not only in curbing portfolio risk but also in inducing revelation of this risk.

KW - Banking regulation

KW - Basel Capital Accord

KW - Capital requirements

KW - Internal Models Approach

KW - Portfolio constraints

KW - Value-at-Risk

UR - https://www.scopus.com/pages/publications/33646877677

U2 - 10.1016/j.jfi.2005.07.001

DO - 10.1016/j.jfi.2005.07.001

M3 - Article

AN - SCOPUS:33646877677

SN - 1042-9573

VL - 15

SP - 362

EP - 394

JO - Journal of Financial Intermediation

JF - Journal of Financial Intermediation

IS - 3

ER -

An analysis of VaR-based capital requirements

Abstract

Keywords

Access to Document

Other files and links

Fingerprint

Cite this