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An evaluation of the effectiveness of Value-at-Risk (VaR) models for Australian banks under Basel III

Author

Listed:
  • Katherine Uylangco

    (Newcastle Business School, University of Newcastle, Callaghan, NSW, Australia)

  • Siqiwen Li

    (College of Business, Law & Governance, James Cook University, Townsville, QLD, Australia
    Research Center of Catastrophe Risk Management, School of Finance, Yunnan University of Finance and Economics, Kunming, China)

Abstract
This study compares Value-at-Risk (VaR) measures for Australian banks over a period that includes the Global Financial Crisis (GFC) to determine whether the methodology and parameter selection are important for capital adequacy holdings that will ultimately support a bank in a crisis period. VaR methodology promoted under Basel II was largely criticised during the GFC for its failure to capture downside risk. However, results from this study indicate that 1-year parametric and historical models produce better measures of VaR than models with longer time frames. VaR estimates produced using Monte Carlo simulations show a high percentage of violations but with lower average magnitude of a violation when they occur. VaR estimates produced by the ARMA GARCH model also show a relatively high percentage of violations, however, the average magnitude of a violation is quite low. Our findings support the design of the revised Basel II VaR methodology which has also been adopted under Basel III.

Suggested Citation

  • Katherine Uylangco & Siqiwen Li, 2016. "An evaluation of the effectiveness of Value-at-Risk (VaR) models for Australian banks under Basel III," Australian Journal of Management, Australian School of Business, vol. 41(4), pages 699-718, November.
    • Handle: RePEc:sae:ausman:v:41:y:2016:i:4:p:699-718
    DOI: 10.1177/0312896214557837
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    References listed on IDEAS

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    More about this item

    Keywords

    Value-at-Risk (VaR); parametric VaR; Monte Carlo simulation; Basel Accords;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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