Title page for ETD etd-12212000-222116


Type of Document Master's Thesis
Author Lang, Todd M.
URN etd-12212000-222116
Title Is Value-at-Risk (VaR) a Fair Proxy for Market Risk Under Conditions of Market Leverage?
Degree Master of Arts
Department Economics (Arts and Sciences)
Advisory Committee
Advisor Name Title
Waud, Roger N. Committee Chair
Lang, William W. Committee Member
Lutton, Thomas J. Committee Member
Keywords
  • Capital Allocation Requirements
  • Market Risk
  • Leverage
  • Value-at-Risk
  • VaR
  • Internal Models Approach
Date of Defense 2000-12-14
Availability unrestricted
Abstract
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.

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