IDEAS home Printed from https://ideas.repec.org/a/eee/jebusi/v64y2012i3p199-213.html
   My bibliography  Save this article

The value of Value-at-Risk: A theoretical approach to the pricing and performance of risk measurement systems

Author

Listed:
  • Wiener, Zvi

Abstract

Risk-based capital adequacy requirements are the main tool employed by government regulators to assure bank stability. This approach allows banks to choose from a number of alternative methods for calculating the required capital. Many systems for measuring risk differ significantly in cost, precision, and in the potential “capital savings”. We develop a statistical model for evaluating risk measurement systems and optimizing the selection process. The model is based on queuing theory. The selection of the optimal system is a function of available capital, the volume and the character of bank activity. While the most precise system may lower a bank's minimal capital reserve requirements, it is not necessarily the optimal system once total costs are evaluated.

Suggested Citation

  • Wiener, Zvi, 2012. "The value of Value-at-Risk: A theoretical approach to the pricing and performance of risk measurement systems," Journal of Economics and Business, Elsevier, vol. 64(3), pages 199-213.
    • Handle: RePEc:eee:jebusi:v:64:y:2012:i:3:p:199-213
    DOI: 10.1016/j.jeconbus.2012.02.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148619512000069
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeconbus.2012.02.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Robert B. Litterman & Tim Shepheard-Walwyn, 1998. "Building a coherent risk measurement and capital optimisation model for financial firms," Economic Policy Review, Federal Reserve Bank of New York, vol. 4(Oct), pages 171-182.
    2. Philippe Artzner, 1999. "Application of Coherent Risk Measures to Capital Requirements in Insurance," North American Actuarial Journal, Taylor & Francis Journals, vol. 3(2), pages 11-25.
    3. Vlaar, Peter J. G., 2000. "Value at risk models for Dutch bond portfolios," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1131-1154, July.
    4. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Haitham M. Yousof & Yusra Tashkandy & Walid Emam & M. Masoom Ali & Mohamed Ibrahim, 2023. "A New Reciprocal Weibull Extension for Modeling Extreme Values with Risk Analysis under Insurance Data," Mathematics, MDPI, vol. 11(4), pages 1-26, February.
    2. Blier-Wong, Christopher & Cossette, Hélène & Marceau, Etienne, 2023. "Risk aggregation with FGM copulas," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 102-120.
    3. Makushkin, Mikhail & Lapshin, Victor, 2023. "Dynamic Nelson–Siegel model for market risk estimation of bonds: Practical implementation," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 69, pages 5-27.
    4. Alessandro Staino & Emilio Russo & Massimo Costabile & Arturo Leccadito, 2023. "Minimum capital requirement and portfolio allocation for non-life insurance: a semiparametric model with Conditional Value-at-Risk (CVaR) constraint," Computational Management Science, Springer, vol. 20(1), pages 1-32, December.
    5. El Attar Abderrahim & El Hachloufi Mostafa & Guennoun Zine El Abidine, 2017. "An Inclusive Criterion For An Optimal Choice Of Reinsurance," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-22, December.
    6. Jones, Bruce L. & Puri, Madan L. & Zitikis, Ricardas, 2006. "Testing hypotheses about the equality of several risk measure values with applications in insurance," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 253-270, April.
    7. Osama H. Mahmoud Hassan & Ibrahim Elbatal & Abdullah H. Al-Nefaie & Mohammed Elgarhy, 2022. "On the Kavya–Manoharan–Burr X Model: Estimations under Ranked Set Sampling and Applications," JRFM, MDPI, vol. 16(1), pages 1-20, December.
    8. Georg Pflug & Nancy Wozabal, 2010. "Asymptotic distribution of law-invariant risk functionals," Finance and Stochastics, Springer, vol. 14(3), pages 397-418, September.
    9. Abate, Arega Getaneh & Riccardi, Rossana & Ruiz, Carlos, 2021. "Contracts in electricity markets under EU ETS: A stochastic programming approach," Energy Economics, Elsevier, vol. 99(C).
    10. Collado, Ricardo & Meisel, Stephan & Priekule, Laura, 2017. "Risk-averse stochastic path detection," European Journal of Operational Research, Elsevier, vol. 260(1), pages 195-211.
    11. Abhinav B. Agrawal & Kash Barker & Yacov Y. Haimes, 2011. "Adaptive multiplayer approach for risk‐based decision‐making: 2006 Virginia Gubernatorial Inauguration," Systems Engineering, John Wiley & Sons, vol. 14(4), pages 455-470, December.
    12. Landsman, Zinoviy & Makov, Udi & Shushi, Tomer, 2016. "Multivariate tail conditional expectation for elliptical distributions," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 216-223.
    13. Cossette, Hélène & Côté, Marie-Pier & Marceau, Etienne & Moutanabbir, Khouzeima, 2013. "Multivariate distribution defined with Farlie–Gumbel–Morgenstern copula and mixed Erlang marginals: Aggregation and capital allocation," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 560-572.
    14. Kerkhof, F.L.J. & Melenberg, B. & Schumacher, J.M., 2002. "Model Risk and Regulatory Capital," Discussion Paper 2002-27, Tilburg University, Center for Economic Research.
    15. Nieto, María Rosa, 2008. "Measuring financial risk : comparison of alternative procedures to estimate VaR and ES," DES - Working Papers. Statistics and Econometrics. WS ws087326, Universidad Carlos III de Madrid. Departamento de Estadística.
    16. Nada M. Alfaer & Ahmed M. Gemeay & Hassan M. Aljohani & Ahmed Z. Afify, 2021. "The Extended Log-Logistic Distribution: Inference and Actuarial Applications," Mathematics, MDPI, vol. 9(12), pages 1-22, June.
    17. Dimitrov, Daniel & van Wijnbergen, Sweder, 2023. "Quantifying Systemic Risk in the Presence of Unlisted Banks: Application to the European Banking Sector," CEPR Discussion Papers 17992, C.E.P.R. Discussion Papers.
    18. Bravo, Jorge Miguel & El Mekkaoui de Freitas, Najat, 2018. "Valuation of longevity-linked life annuities," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 212-229.
    19. Montagut, Esperanza H., 2004. "Hedging bond portfolios versus infinitely many ranked factors of risk," DEE - Working Papers. Business Economics. WB wb043312, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    20. Pflug Georg Ch., 2006. "On distortion functionals," Statistics & Risk Modeling, De Gruyter, vol. 24(1/2006), pages 1-16, July.

    More about this item

    Keywords

    Basel accord; Capital adequacy; Risk measurement; Value-at-Risk (VaR); Queuing theory; Erlang formula; Financial institution regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:64:y:2012:i:3:p:199-213. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-economics-and-business .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.