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6 - Evaluating Banks’ Value-at-Risk Models during the COVID-19 Crisis

Published online by Cambridge University Press:  02 March 2023

By
Chris Anderson  and
Dennis Mawhirter
Edited by
David Lynch ,
Iftekhar Hasan  and
Akhtar Siddique
David Lynch
Affiliation:
Federal Reserve Board of Governors
Iftekhar Hasan
Affiliation:
Fordham University Graduate Schools of Business
Akhtar Siddique
Affiliation:
Office of the Comptroller of the Currency
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Summary

This chapter examines how banks’ Value-at-Risk (VaR) models performed during the COVID-19 crisis using regulatory trading desk-level data. It first evaluates whether banks’ VaR models were incomplete by checking whether various factors predict backtesting exceptions. Backtesting exceptions from the past ten business days and the level of the VIX forecast future exceptions. Predictability from past backtesting exceptions rises during the COVID-19 crisis relative to 2019. The results do not find any single market factor that related to contemporaneous backtesting exceptions. These results hold both in the aggregate and across asset classes.

Keywords

VaR modelsCovid-19
Type
Chapter
Information
Validation of Risk Management Models for Financial Institutions
Theory and Practice
 , pp. 104 - 123
Publisher: Cambridge University Press
Print publication year: 2023

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References

Berkowitz, J., Christoffersen, P. and Pelletier, D. (2009). Evaluating Value-at-Risk models with desk-level data. Management Science, 57(12), 2213–2227.Google Scholar
Berkowitz, J. and O’Brien, J. (2002). How accurate Are Value-at-Risk models at commercial banks? The Journal of Finance, 57(3), 1093–1111.CrossRefGoogle Scholar
Christoffersen, P. (2011). Elements of Financial Risk Management. Academic Press. Google-Books-ID: YkcMBGYbRasC.Google Scholar
O’Brien, J. and Szerszen, P. J. (2014). An evaluation of bank VaR measures for market risk during and before the financial crisis. Finance and Economics Discussion Series (FEDS).Google Scholar
Perignon, C., Deng, Z. Y. and Wang, Z. J. (2008). Do banks overstate their value-at-risk? Journal of Banking & Finance, 32(5), 783–794.Google Scholar
Perignon, C. and Smith, D. R. (2010a). Diversification and value-at-risk. Journal of Banking & Finance, 34(1):55–66.Google Scholar
Perignon, C. and Smith, D. R. (2010b). The level and quality of value-at-risk disclosure by commercial banks. Journal of Banking & Finance, 34(2), 362–377.Google Scholar

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