Evaluation of Basel III revision of quantitative standards for implementation of internal models for market risk

摘要

This paper studies the impact of the revision by the Basel Committee in 2011 of one of the quantitative standards for internal models of market risk. The revision allows calculation of the Value-at-Risk (VaR) using a weighting scheme on historical data (or data lengths less than a year) as long as the resultant capital charge is at least as conservative as that using un-weighted data. This study applies the historical simulation method to calculate VaR for ten year long daily returns data of Indian stocks and the INR/USD exchange rate. Data lengths of 1000, 750, 500 and 250 days are used in combination with data lengths of 190 and 125 days to evaluate impact of the revision. The VaRs generated by each data length individually and by the combinations of long and short data lengths are evaluated using four tests, namely the regulatory back test; and hypotheses tests of unconditional coverage, independence, and conditional coverage of VaR exceptions.