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Can VAR Be Predictive for Regulation? Evidence from the Futures Industry in Taiwan

Author

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  • Matthew C. Chang

    (1Department of Wealth Management, Hsuan Chuang University, Taiwan.)

  • Jui-Cheng Hung

    (Department of Banking and Finance, Chinese Culture University, Taiwan.)

Abstract

Financial authorities are monitoring the financial industries by their own capital to ensure that financial industries have sufficient equity capital to absorb a variety of financial business risks. The current method applied for regulating the capital adequancies of futures commission merchants (FCMs) in Taiwan is Adjusted Net Capital (ANC) ratio, which is also applied in the U.S. In this study, we add the Valueat- Risk (VaR) estimated by GJR-GARCH model and the delta-gamma approach to the calculation of ANC (VaR-based ANC), to compare it with ANC, and further to investigate the ability of prediction on VaR. The sample period is from 2006 through 2007, totally 495 trading days . We conclude that VaR-based ANC ratio in certain intervals ratio have better warning ability of prediction than ANC. Moreover, for the FCMs whose capital adequancies are more volatile and the FCMs with higher capital adequancies, the warning effects of inclusion of VaR into ANC ratio is even more significant.

Suggested Citation

  • Matthew C. Chang & Jui-Cheng Hung, 2012. "Can VAR Be Predictive for Regulation? Evidence from the Futures Industry in Taiwan," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 147-162, December.
    • Handle: RePEc:rjr:romjef:v::y:2012:i:4:p:147-162
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    ANC; VaR; GJR-GARCH; futures industry;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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