IMA for market risk

[shanlane]

Hello,

When you say "monthly updating" for market risk VaR, does this mean we only have to calulate this every month or does this have something to do with adjusting our model (data, etc) every month?

Thanks!

Shannon

 

[David Harper CFA FRM]

Hi Shannon,

Among the set of Quantitative requirements, Basel II required:

718...(e) Banks should update their data sets no less frequently than once every three months and should also reassess them whenever market prices are subject to material changes. The supervisory authority may also require a bank to calculate its value-at-risk using a shorter observation period if, in the supervisor’s judgement, this is justified by a significant upsurge in price volatility.

But Basel 2.5 updated this to mandatory:

Banks must update their data sets no less frequently than once every month and reassess them whenever market prices are subject to material changes. This updating process must be flexible enough to allow for more frequent updates. The supervisory authority may also require a bank to calculate its value-at-risk using a shorter observation period if, in the supervisor’s judgement, this is justified by a significant upsurge in price volatility.

It's not me saying it, as you know , it's Basel http://www.bis.org/publ/bcbs158.htm

Thanks,

 

[shanlane]

Thank you.

I know. I tend to over use the royal "you". Sorry about that.

Now for the real question: So if we are only supposed to update our data set every month (in normative times) does this mean that we have the same VaR for this whole period?

Same question goes for stressed VaR. In the videos "you" say that it should be updated at least every week.

Then it says that we should use " an average of the daily value at risk measures on each of the preceeding 60 business days". So does this mean that if the data set is only updated every month that we will just use the same VaR measure for each of the past 20 business days?

Finally, (sorry) in slide 22 of video 7d you stress how backtesting results (while finding the "plus" factors) are based on VaR and not stressed VaR, yet the factors are different. How is this so?

Thanks!

Shannon