Backtesting for Risk-Based Regulatory Capital

F.L.J. Kerkhof, B. Melenberg

Research output: Working paperDiscussion paperOther research output

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Abstract

In this paper we present a framework for backtesting all currently popular risk measurement methods (including value-at-risk and expected shortfall) using the functional delta method.Estimation risk can be taken explicitly into account.Based on a simulation study we provide evidence that tests for expected shortfall with acceptable low levels have a better performance than tests for value-at-risk in realistic financial sample sizes.We propose a way to determine multiplication factors, and find that the resulting regulatory capital scheme using expected shortfall compares favorably to the current Basle Accord backtesting scheme.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages31
Volume2002-110
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-110

Fingerprint

Backtesting
Expected shortfall
Regulatory capital
Value at risk
Sample size
Delta method
Measurement method
Estimation risk
Simulation study
Factors
Basle Accord
Risk measurement

Keywords

  • risk management
  • capital

Cite this

Kerkhof, F. L. J., & Melenberg, B. (2002). Backtesting for Risk-Based Regulatory Capital. (CentER Discussion Paper; Vol. 2002-110). Tilburg: Finance.
Kerkhof, F.L.J. ; Melenberg, B. / Backtesting for Risk-Based Regulatory Capital. Tilburg : Finance, 2002. (CentER Discussion Paper).
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Kerkhof, FLJ & Melenberg, B 2002 'Backtesting for Risk-Based Regulatory Capital' CentER Discussion Paper, vol. 2002-110, Finance, Tilburg.

Backtesting for Risk-Based Regulatory Capital. / Kerkhof, F.L.J.; Melenberg, B.

Tilburg : Finance, 2002. (CentER Discussion Paper; Vol. 2002-110).

Research output: Working paperDiscussion paperOther research output

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AB - In this paper we present a framework for backtesting all currently popular risk measurement methods (including value-at-risk and expected shortfall) using the functional delta method.Estimation risk can be taken explicitly into account.Based on a simulation study we provide evidence that tests for expected shortfall with acceptable low levels have a better performance than tests for value-at-risk in realistic financial sample sizes.We propose a way to determine multiplication factors, and find that the resulting regulatory capital scheme using expected shortfall compares favorably to the current Basle Accord backtesting scheme.

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KW - capital

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Kerkhof FLJ, Melenberg B. Backtesting for Risk-Based Regulatory Capital. Tilburg: Finance. 2002. (CentER Discussion Paper).