An Evaluation of Bank VaR Measures for Market Risk During and Before the Financial Crisis

53 Pages Posted: 2 Apr 2014

See all articles by James M. O'Brien

James M. O'Brien

Board of Governors of the Federal Reserve System - Trading Risk Analysis Section

Pawel Szerszen

Board of Governors of the Federal Reserve System

Date Written: March 07, 2014

Abstract

We study the performance and behavior of Value at Risk (VaR) measures used by a number of large banks during and before the financial crisis. Alternative benchmark VaR measures, including GARCH-based measures, are also estimated directly from the banks' trading revenues and help to explain the bank VaR performance results. While highly conservative in the pre-crisis period, bank VaR exceedances were excessive and clustered in the crisis period. All benchmark VaRs were more accurate in the pre-crisis period with GARCH VaR measures the most accurate in the crisis period having lower exceedance rates with no exceedance clustering. Variance decompositions indicate a limited ability of the banks' VaR methodologies to adjust to the crisis-period market conditions. Despite their weaker performance, the bank VaRs exhibited greater predictive power for a measure of realized PnL volatility than benchmark VaR measures. Benchmark Expected Shortfall measures are also considered.

Keywords: market risk, value at risk, backtesting, profit and loss, financial crisis

JEL Classification: G01, G21, G28

Suggested Citation

O'Brien, James Michael and Szerszen, Pawel, An Evaluation of Bank VaR Measures for Market Risk During and Before the Financial Crisis (March 07, 2014). FEDS Working Paper No. 2014-21, Available at SSRN: https://ssrn.com/abstract=2418345 or http://dx.doi.org/10.2139/ssrn.2418345

James Michael O'Brien

Board of Governors of the Federal Reserve System - Trading Risk Analysis Section ( email )

Washington, DC 20551
United States

Pawel Szerszen (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/research/staff/szerszenpawelj.htm

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