Credit risk is the most important type of risk in terms of monetary value. Another key
risk measure is market risk, which is concerned with stocks and bonds, and related
financial derivatives, as well as exchange rates and interest rates. This paper is
concerned with market risk management and monitoring under the Basel II Accord,
and presents Ten Commandments for optimizing Value-at-Risk (VaR) and daily
capital charges, based on choosing wisely from: (1) conditional, stochastic and
realized volatility; (2) symmetry, asymmetry and leverage; (3) dynamic correlations
and dynamic covariances; (4) single index and portfolio models; (5) parametric,
semiparametric and nonparametric models; (6) estimation, simulation and calibration
of parameters; (7) assumptions, regularity conditions and statistical properties; (8)
accuracy in calculating moments and forecasts; (9) optimizing threshold violations
and economic benefits; and (10) optimizing private and public benefits of risk
management. For practical purposes, it is found that the Basel II Accord would seem
to encourage excessive risk taking at the expense of providing accurate measures and
forecasts of risk and VaR.
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