A word of caution on calculating market -based minimum capital risk requirements

Brooks, C., Clare, A.D. and Persand, G. (2000) A word of caution on calculating market -based minimum capital risk requirements Journal of Banking and Finance, 24, (10), pp. 1557-1574. (doi:10.1016/S0378-4266(99)00092-8).


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This paper demonstrates that the use of GARCH-type models for the calculation of minimum capital risk requirements (MCRRs) may lead to the production of inaccurate and therefore inefficient capital requirements. We show that this inaccuracy stems from the fact that GARCH models typically overstate the degree of persistence in return volatility. A simple modification to the model is found to improve the accuracy of MCRR estimates in both back- and out-of-sample tests. Given that internal risk management models are currently in widespread usage in some parts of the world (most notably the USA), and will soon be permitted for EC banks and investment firms, we believe that our paper should serve as a valuable caution to risk management practitioners who are using, or intend to use this popular class of models.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1016/S0378-4266(99)00092-8
ISSNs: 0378-4266 (print)
Keywords: minimum capital risk requirements, internal risk management models, volatility persistence
ePrint ID: 35884
Date :
Date Event
Date Deposited: 23 May 2006
Last Modified: 16 Apr 2017 22:07
Further Information:Google Scholar
URI: http://eprints.soton.ac.uk/id/eprint/35884

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