Is Value-at-Risk (VaR) a Fair Proxy for Market Risk Under Conditions of Market Leverage?

Ex-post intraday market-risk extrema are compared with ex-ante standard RiskMetrics parametric Value-at-Risk (VaR) limits for three foreign currency futures markets (British Pound, Japanese Yen, Swiss Frank) to determine whether forecasted volatility of market returns based on settlement price data provides a valid proxy for short-term market risk independent of market leverage. Intraday violations of ex-ante one-day VaR limits at the 95% confidence level should occur for less than 5% of market days. Violation frequencies for each of the markets tested are shown to occur well in excess of this 5% tolerance level: 9.54% for the British Pound, 7.09% for the Japanese Yen, and 7.79% for the Swiss Franc futures markets. Thus, it is empirically demonstrated that VaR is a poor proxy for short-term market risk under conditions of market leverage. Implications for managing (measuring, monitoring, controlling), reporting, and regulating financial market risk are discussed.

Name thesis:degree_name

Master of Arts

Level thesis:degree_level

masters

Discipline thesis:degree_discipline

Economics

Department dc:contributor.department

Economics

Grantor dc:publisher

Virginia Tech

Year dc:date.issued

2000

Author dc:creator

• Lang, Todd M.

Chair dc:contributor.committeechair

• Waud, Roger N.

Committee members dc:contributor.committeemember

• Lutton, Thomas J.
• Lang, William W.

• Capital Allocation Requirements
• Market Risk
• Leverage
• Value-at-Risk
• VaR
• Internal Models Approach

Statement dc:rights

• In Copyright

Licence dc:rights.uri

• http://rightsstatements.org/vocab/InC/1.0/

Dc Identifier Other

etd-12212000-222116

OAI identifier oai:identifier

oai:vtechworks.lib.vt.edu:10919/36361