Testing risk proxies for financial collateral haircuts: adequacy of capturing tail risk

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216224%3A14560%2F20%3A00115950" target="_blank" >RIV/00216224:14560/20:00115950 - isvavai.cz</a>

Result on the web

<a href="https://www.emerald.com/insight/content/doi/10.1108/JRF-07-2019-0135/full/html" target="_blank" >https://www.emerald.com/insight/content/doi/10.1108/JRF-07-2019-0135/full/html</a>

DOI - Digital Object Identifier

<a href="http://dx.doi.org/10.1108/JRF-07-2019-0135" target="_blank" >10.1108/JRF-07-2019-0135</a>

Result language

angličtina

Original language name

Testing risk proxies for financial collateral haircuts: adequacy of capturing tail risk

Original language description

The use of risk proxies in internal models remains a popular modelling solution. However, there is some risk that a proxy may not constitute an adequate representation of the underlying asset in terms of capturing tail risk. Therefore, using empirical examples for the financial collateral haircut model, this paper aims to critically review available statistical tools for measuring the adequacy of capturing tail risk by proxies used in the internal risk models of banks. In doing so, this paper advises on the most appropriate solutions for validating risk proxies. This paper reviews statistical tools used to validate if the equity index/fund benchmark are proxies that adequately represent tail risk in the returns on an individual asset (equity/fund). The following statistical tools for comparing return distributions of the proxies and the portfolio items are discussed: the two-sample Kolmogorov–Smirnov test, the spillover test and the Harrell’s C test. Upon the empirical review of the available statistical tools, this paper suggests using the two-sample Kolmogorov–Smirnov test to validate the adequacy of capturing tail risk by the assigned proxy and the Harrell’s C test to capture the discriminatory power of the proxy-based collateral haircuts models. This paper also suggests a tool that compares the reactions of risk proxies to tail events to verify possible underestimation of risk in times of significant stress. The current regulations require banks to prove that the modelled proxies are representative of the real price observations without underestimation of tail risk and asset price volatility. This paper shows how to validate proxy-based financial collateral haircuts models.

Czech name

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Czech description

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Type

J_SC - Article in a specialist periodical, which is included in the SCOPUS database

CEP classification

—

OECD FORD branch

50206 - Finance

Project

—

Continuities

I - Institucionalni podpora na dlouhodoby koncepcni rozvoj vyzkumne organizace

Publication year

2020

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Name of the periodical

The Journal of Risk Finance

ISSN

1526-5943

e-ISSN

—

Volume of the periodical

21

Issue of the periodical within the volume

3

Country of publishing house

GB - UNITED KINGDOM

Number of pages

18

Pages from-to

299-316

UT code for WoS article

000547892100001

EID of the result in the Scopus database

2-s2.0-85087568428