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45 Ansichten64 SeitenAdvanced Macroeconomics

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MACROECONOMIC

Risk Centric Macroeconomic

perspective of macroeconomics provides a

unified framework to think about the

mechanisms behind several of the main

economic imbalances, crises, and

structural fragilities observed in recent

decades in the global economy. This

perspective sheds light on the kind of

policies, especially unconventional ones,

that are likely to help the world economy

navigate this tumultuous environment.

Risk Centric Macroeconomic

is the observation that economic activity

generates output and risks. Economic agents

must absorb both to ensure a smooth growth

process.

During normal expansions and contractions,

macroeconomists (and our models) mainly focus

on goods markets, studying whether the demand

for output is well aligned with potential output,

while risk markets considerations are relegated

to a secondary role, mostly relevant to the field

of finance.

Risk Centric Macroeconomic

economy with heterogenous and highly

interconnected financial markets. These

markets operate in different currencies and

are exposed to large swings in capital

flows. These flows provide many useful

services to the global economy but can be

fickle, perhaps because foreign crises

cause faster transitions from speculation.

LITERATURE REVIEW

Journal 1.

(Un)Conventional monetary policy and

bank risk-taking: A nonlinear

relationship

Introductio

n

THEORIES

Research Method

The Z-score is the most widely used accounting-based risk measure in the

banking literature to identify the balance-sheet vulnerability since it considers

a bank’s capital being insuﬃcient to cover its losses in case of a default event.

These measures are merely asset quality indicators and are not related to any

default event, i.e., a bank may be aware that the quality of its assets is

deteriorating without being threatened by default.

• The market perception of bank risk is measured by the Distance to

Default, which is computed with standard Black and Scholes (1973) and

Merton (1974) option models and is applied to estimate individual

(Andries et al., 2018; Vassalou and Yuhang, 2004; Laeven, 2002)

• The DD is computed with the Merton (1974) option model and shows

how far a bank is from a default event, i.e., the lower its values, the

closer the bank is to insolvency. This measure has been applied to price

deposit insurance and to estimate individual and systemic bank risk

(Lehar, 2005

• DD reflects both the evolution of banks’ market value and their ability

to cover the market value of their total debt. As a result of the collapse

of stock markets across Europe, the market value of European banks

has fallen, threatening their ability to repay debt. As CEE banks were

scarcely aﬀected by the crisis, the minimum level of the DD does not

reflect a threat to the stability of these banking systems.

Monetary policy tools

of monetary policy, author rely on four diﬀerent variables. We first

consider an observable >> interest rate variable, the policy interest, rate

(ir), the principal central banks’ instrument.

• the interest rate on the deposit facility (id), which may be an indicator of

unconventional monetary policy (UMP) since many European Central

Banks have set this policy rate below Zero.

• Authors also use the Central Banks’s Assets (in long) (CBA) to capture

quantitative easing measures. While the policy interest rate indicator

might be bounded by a zero lower limit, CBA captures the unconventional

monetary stance with an unusually high increase of the central bank’s

balance sheet.

• Monetary policy data are individual to countries, except for the interest

rate variables, which are identical for euro area members after their

accession. The CBA data are individually collected for all countries.

Conclusion (1)

This paper investigates the eﬀect of monetary policy - especially unconventional monetary

policy - on bank risk-taking behavior in Europe over the period 2000–2015.

The Authors Using a dynamic panel model with a threshold eﬀect, they estimate this eﬀect

on two measures of bank risk: the Distance to Default, which reflects the market perception

of risk, and the asymmetric Z-score, which corresponds to an accounting-based measure of

the risk.

This Paper find that loosening monetary policy (via low interest rates and increasing central

banks’ liquidity) has a harmful eﬀect on banks’ risk, confirming the existence of the risk-

taking channel. Moreover, we show that this relationship is nonlinear, i.e., with the

sustainable implementation of unconventional monetary policies, the eﬀects are stronger

below a certain threshold.

There are four monetary policy variables: the policy interest rate, the interest on the

deposit facility, the shadow interest rate, which is a good proxy for unconventional

monetary policy (UMP), and the logarithm of central banks’ total assets. More precisely,

this paper aim to investigate whether monetary authorities’ instruments have a non-

linear eﬀect on bank risk-taking behavior.

The model provides interesting results when taking into account threshold eﬀects. We

find a nonlinear eﬀect for both measures. The decline in central bank rates, or the rise in

the monetary base, reflect riskier banks’ behavior. This result is in line with the literature

and suggests that the bank risk-taking channel was at play before the emer-gence of the

GFC. More important, our second contribution indicates

Conclusion (2)

when interest rate indicators are low and below the threshold, the negative

relationship between bank risk measures and monetary policy is stronger.

Accounting for the central banks’ balance sheet policy indicates that

additional liquidity encourages banks to take riskier positions. Their behavior

becomes even riskier after the implementation of UMP. These findings are

confirmed when (1) using the loans-to-assets ratio as a measure of risk, (2)

using the traditional Z-score and (3) using the shadow short rate for each

country as a monetary policy variable.

These results indicate that monetary policy does have an impact on banks’

risk-taking and that monetary authorities should be concerned about this.

They cannot set monetary conditions only on the basis of the final

objectives of monetary policy. They must also take into account their eﬀect

on financial stability. A too accommodating monetary policy can contribute to

the accumulation of financial imbalances and diﬃculties in banking industry.

Prudential regulation, while reducing these risks, is not suﬃcient when

monetary policy is too accommodating.

Journal 2

(Monetary policy and systemic risk-taking in the euro area

banking sector)

Introduction

THEORIES

Economic Methodology Data Results

Results

This

This study

study uses

uses aa large

large

macro

macro financial

financial database

database This

This section

section presents

presents thethe

of

of 519

519 times

times series

series results

results of of CMP

CMP shocks

shocks

including

including systemic

systemic risk risk during

during 2002Q4-2017Q2,

2002Q4-2017Q2,

indicators

indicators of of thethe 30 30 and

and of of UMP

UMP and and

largest

largest euro

euro area

area “signaling

“signaling shocks”

shocks” during

during

banking

banking groups.

groups. These

These 2008Q4-2017Q2

2008Q4-2017Q2

banking

banking groups

groups come come ItIt seems

seems with

with Jimenez

Jimenez et et

from

from countries

countries that that al

al (2014)

(2014) suggestion

suggestion that that

behaved

behaved diﬀerently

diﬀerently lower

lower interest

interest rates

rates

during

during the the European

European reduce

reduce banks’

banks’ total

total credit

credit

sovereign

sovereign debt debt crisis

crisis risk

risksince

since the

the volume

volume of of

with

with respect

respect toto the

the bank

bank outstanding

outstanding loans loans isis

sovereign

sovereign nexus

nexus larger

larger than

than the

the volume

volume of of

Data

Data are

are form

form thethe ECB,

ECB, new

new loans

loans

Bloomberg,

Bloomberg, BIS, BIS, and and there

there isis evidence

evidence that that

Eurostat

Eurostat systemic

systemic riskrisk inin the

the form

form

of

of vulner-abilities

vulner-abilities

increases

increases in in the

the banking

banking

industry

industry via via contagion

contagion

and

and intercon-nectedness

intercon-nectedness

Conclusi

on

The abundant empirical evidence available on the significance of the risk-taking channel

of monetary policy is not enough to be concerned about the possibility of a monetary

policy trade-oﬀ between price stability and financial stability. Systemic risk in the banking

sector, while operating through the traditional risk-taking channel of monetary policy, i.e.

via banks’ balance sheets, profitability and leverage, in order to be properly measured,

also requires the inclusion of contagion, interconnectedness, lending standards, time-

varying correlations and feedback eﬀects between asset prices and banks’ balance

sheets. The several dimensions of systemic risk must be taken into account to be able to

draw robust policy implications.

The results also highlight the importance of extending the study of systemic risk-taking to

non-bank financial intermediaries holding long-term liabilities and short-term assets, such

as pension funds, and to insurance companies and investment funds as well.

The main policy implication of this research is that a persistently accommodative

monetary policy may drive a monetary authority with a price stability mandate to

consider a possible trade-oﬀ with financial stability. Several options are possible, although

discussing them goes beyond the scope of this paper. However, without changing existing

monetary policy frameworks to accommodate the possible trade-oﬀ, the results do

suggest, at a minimum, that the coordination between monetary and macro-prudential

policies requires serious consideration.

SYSTEMIC FINANCIAL RISK AND MACROECONOMIC 3

ACTIVITY IN CHINA

Researchers have constructed various risk indexes vis-à-vis

a wide range of systemic risks since the outbreak of the

global financial crisis in 2008. Nevertheless, most indexes

target a certain aspect of systemic risk, and are thus

incapable of measuring innately complex systemic risk in a

comprehensive way. In addition, all existing indexes of

systemic risk focus exclusively on the financial market.

Consequently, they overlook its connection with the real

economy .

In order to fill in the gap, we have synthesized a number of

financial risk measures to construct a comprehensive index

of the financial systemic risk of China by using the Principal

Components Quantile Regression (PCQR). Our results

show that this index is able to measure multi-dimension

financial risk and predict its impact on the real economy of

China more accurately than most other existing risk indexes

such as term spreads.

Method

• Using the Principal Components Quantile Regression (PCQR)

method, we construct a systemic financial risk index that aggregates

information from 15 popular measures of systemic risk.

Method

efficient forecasting performance of risk index i.

Method

2. The construction of systemic risk index

Empirical Results

1. Measures of systemic risk

Empirical Results

2. Measurement of macroeconomic shocks

Conclusion

Quantile Regression (PCQR) to construct a

comprehensive systemic risk for China. Our PCQR

index is able to provide an accurate forecast of

macroeconomic shocks in China supported by the

empirical results.

collect the data, provided its accessibility, that the

central bank of China uses for the construction of its

own risk index and employ an RMSE test to check if

governmental indexes perform any better than our

PCQR index does.

MACROECONOMIC RISK AND HEDGE FUND

RETURNS

4

This paper estimates hedge fund and mutual fund

exposure to newly proposed measures of

macroeconomic risk that are interpreted as measures of

economic uncertainty. We find that the resulting

uncertainty betas explain a significant proportion of the

cross-sectional dispersion in hedge fund returns.

However, the same is not true for mutual funds, for

which there is no significant relationship.

After controlling for a large set of fund characteristics

and risk factors, the positive relation between

uncertainty betas and future hedge fund returns remains

economically and statistically significant. Hence, we

argue that macroeconomic risk is a powerful

determinant of cross-sectional differences in hedge fund

returns.

Method

default spread, term spread, short-term interest rate

changes, aggregate dividend yield, equity market

index, inflation rate, unemployment rate, and the

growth rate of real Gross Domestic Product (GDP)

per capita.

generated by esti- mating time-varying conditional

volatility of the afore- mentioned economic indicators

based on Vector Autoregressive–Generalized

Autoregressive Conditional Heteroskedasticity (VAR–

GARCH) model,

Result

Result

Result

funds in the highest uncertainty beta quintile generate

6% to 9% higher average annual returns compared to

funds in the lowest uncertainty beta quintile.

In addition, we investigate whether the predictive power

of uncertainty beta for future fund returns changes

across specific hedge fund categories. Empirical

analysis indicates that the economic and statistical

significance of the uncer- tainty betas gradually

improves as we move from the least directional to the

most directional strategies, implying a stronger relation

between uncertainty beta and future returns for funds

with sizeable time-series variation in uncertainty betas

Dynamics of the Impact of Currency Fluctuation On 5

Stock Market In India: Assessing The Pricing Of

Exchange Rate Risks

• This paper studies the dynamics of the impact of

currency fluctuation in india stock market by assessing

the pricing of exchange rate risk during the period

2005 – 2016 specifically before and after financial

crisis. Estimating a two-factor arbitrage pricing model,

using a random coefficient model, the paper present

evidence that stock returns react significantly to foreign

exchange rate fluctuation in the post-crisis period.

particularly, at 2012-2016 the exchange rate risk factor

is becoming a prominent determinant of stock returns,

indicating that indian investors are increasingly

expecting risk premiumon their investment for their

added exposureto exchange rate risk.

Empirical Model

data

1. Food & agro-based products (26)

• This study use secondary 2. Textiles (16)

data. The data was collected 3. Chemicals and chemical

using prowess which is a products (78)

database of the financial 4. Consumer goods (21)

performance of india 5. Construction material (24)

companies maintened by 6. Metals and metal products (24)

centre for monitoring indian 7. Machinery (31)

8. Transport equipment (26)

economy. The average of

9. Miscellaneous manufacturing (9)

the company stock prices for 10. Diversified (11)

each month was taken as the 11. Mining (6)

portfolio averages on which 12. Electricity (15)

monthly returns were 13. Services - other than financial

calculated. The portfolios are: (102)

14. Construction and Real Estate

(32)

15. Financial Services (79)

Methodology and Empirical Results

The market excess return series and exchange rate series have been

tested for stationarity using the ADF test. The correlation between the

excess market return series and the exchange rate series is calculated

to be 0.125 which is a reasonable explanation to justify the use of the

residuals of the regression between these two variables in order to

ensure orthogonality. The parameters, in equation (4) are estimated

using OLS.

The Hausman test between random and fixed effects suggested that a

random effects model would fit the data better. However, according to

Hsiao and Pesaran (2004), “Conventional models do not allow the

interaction of the individual specific and/or time-varying differences in the

included explanatory variables.” This was the rationale behind using

Random Coefficient models for estimation with the kind of panel data

we have. Aquino (2005) uses the Generalized Least Squares Seemingly

Unrelated Regression estimation technique to simultaneously estimate

the betas and pricing parameters.

Main findings remain invariant post such robustness test. Most of the

industry portfolios except for few industries such as ‘Electricity’,

‘Construction and Real Estate’ and ‘Financial Services’, we do not

observe non-linearity.

conclusion

• The impact of foreign exchange fluctuations on stock returns is

increasingly becoming a prominent issue to investors, financiers and

policymakers

• Empirical evidence suggests that investors are expectant of a risk

premium on their investment owing to the increased risk exposure

caused by exchange rate fluctuations, especially since the last few

years beginning from the crisis period. This implies inadequate

hedging by firms for the exchange rate risk and in the larger

macroeconomic sense, it displays market inefficiencies in the stock

market and/or foreign exchange market.

• The study has qualitatively inferred from the results obtained, that

Indian investors now require compensation for bearing exchange

rate risk. However, the quantitative aspects such as the difference

between the risk premiums demanded by investors in the various

time periods are beyond the scope of the present paper and are left

for future research.

Forecasting exchange rate value at risk using deep 6

belief network ensemble based approach

by kaijian He, lei ji, Geoffrey k.f.tso, bangzhu zhu, and yingchao zou

the Deep Belief Network ensemble model with Empirical

Mode Decomposition (EMD) technique. It attempts to capture

the multi-scale data features with the EMD-DBN ensemble

model and predict the risk movement more accurately.

Individual data components are extracted using EMD model

while individual forecasts can be calculated at different scales

using ARMA-GARCH model. The DBN model is introduced to

search for the optimal nonlinear ensemble weights to combine

the individual forecasts at different scales into the ensembled

exchange rate VaR forecasts. Empirical studies using major

exchange rates confirm that the proposed model

demonstrates the superior performance compared to the

benchmark models.

Methodology

Deep Learning (DL) has attracted signiﬁcant research attentions from both

academics and industry since it was originally proposed in 2006 [17]. Deep

Belief Network (DBN) is a generative graphical model in the general deep

learning framework. Like traditional shallow neutral network, the neurons in DBN

have activation function and process the information. As the number of layers

increases rapidly from the shallow neural network to the deep neural network,

the number of the parameters involved in training deep neural network increases

exponentially. To reduce the over ﬁtting problem, the pre-training using a stack of

a number of restricted Boltzmann machines(RBMs) is introduced in DBN. RBM

is used as the pre-training model to learn the hidden data feature in an

unsupervised learning process. A RBM is a neural network that consists of two

layers called visible (input) layer and hidden layer. In RBM, neurons in the

diﬀerent levels of layers have mutual undirected connection while the neurons in

the same level of layers are independent [18]. In the structure of RBM , v and h

represent the state of the neurons of visible layer and hidden layer respectively.

When a number of RBMs are stacked in DBN, the hidden layer of the previous

RBM serves as the visible layer of the following RBM [19].

conclusion

• In this paper, we have proposed a DBN based nonlinear

ensemble model with EMD technique, for estimating value at

risk. DBN has been used to aggregate the ensemble multi

scale risk forecasts in the foreign exchange market. Positive

performance improvement in risk estimates have been

observed. Results in this paper have demonstrated that the

use of DBN model could identify more optimal ensemble

weights and better integrate the partial information from

extracted risk estimates. This approach leads to the

forecasting accuracy improvement of the multiscale VaR

estimate models. Work in this paper implies that new

innovative deep learning model can take into account the

domain knowledge in the risk estimate ﬁeld to gain better

insights in the risk estimate ﬁeld and achieve the improved

forecasting accuracy.

International trade, foreign direct investments, and firms’ systemic risk :

LITERATURE REVIEW Evidence from the Netherlands

7

Annelies Van Cauwenberge, Mark Vancauteren, Roel Braekers, Sigrid

Vandemaele(2019)

This paper measures the contribution of firms in the financial and non-financial

sectors to systemic risk. This paper quantify systemic risk as possible risk

spillovers from individual firms to the economy by taking into account time varying

linkages between the firm and the economy.

DATA AND MODEL ANALYSIS

This paper use the conditional value-at-risk (ΔCoVaR), defined by Girardi and

Ergün (2013), as a parsimonious measure of systemic risk that makes it

possible to go further into the tail. Beside that, ΔCoVaR makes it possible to

combine the macro-prudential risk perspective (the systemic risk of the system)

and complement it with micro-prudential insights of individual firms (the systemic

risk contributions of the individual firms).

Data of this research based on a novel dataset that combines data on

international trade and foreign direct investments with daily stock data for 67

Dutch listed companies from 2006–2015.

Systemic risk contributions of the financial and

non-financial sectors

The administrative and support service activities sector is, on average, the

largest risk contributor, while the construction sector exhibits the highest volatility

in systemic risk contribution. Since consumers are less able to postpone the

consumption of goods from the wholesale and retail sector, this sector is (as

expected) the least systemic risk-contributing sector, on average.

The results suggest that the distress of a firm in the administrative and support

service or construction sectors results in higher average losses and a higher

degree of volatility of the Dutch economy than the distress of a firm in the

wholesale and retail sector

Globalization as a determinant of

systemic risk

with highly significant firm characteristics. Mainly

log(VaR) and, to a lesser extent, log(Size) explain

systemic risk contributions.

Model (2) indicates that the three globalization

measures are highly significant determinants of

systemic risk. The results are in line with those of the

univariate analysis: trade-intensive firms contribute

less systemic risk; firms under foreign control and/or

with foreign subsidiaries have higher systemic risk

contributions than firms that are not under foreign

control and/or do not have foreign subsidiaries.

model (3) sector dummies in all sector leaving

financial and insurance activities sector to compare

the systemic risk contribution of the non-financial

sector. The highest systemic risk contributions in the

sectors of administrative and support service,

construction, and transportation and storage.

Executive compensation among Australian mining and non-mining firms:

LITERATURE REVIEWRisk taking, long and short-term incentives

8

Subba Reddy Yarram, John Rice (2017)

mining and non-mining firms that were listed on the Australian All Ordinaries Index

for the period 2005 to 2013. These miners tend to have more volatile earnings,

operate with less certainty and higher risk in relation to capital investment

This study employs a sample of firms listed on the ASX and members of the

All Ordinaries Index for the period 2005 to 2013. All financial firms are

excluded given the highly regulated nature of the financial sector. The final

sample consists of 129 mining firms and 332 non-mining firms, with a total of

862 mining-firm-years and 2373 nonmining-firm-years for the study period of

2005 to 2013

This paper estimate the following random effects panel data model with

cluster robust standard errors

DATA

correlations among variables

positively correlated to total compensation. Growth, performance

and higher levels of substantial shareholding on the other hand are

negatively related to total compensation. Firms that have

remuneration committees also show that these committees are

highly independent.

Results of Panel Random Effects Models

significant positive influence on pay

levels in individual firms, with this true for

both mining and non-mining firms.

Economic variables have significant

influences on the pay levels of Australian

mining and non-mining firms. Firm size

has a significant positive influence on

pay levels.

Similarly performance as measured by

Tobin's Q has a significant positive

influence on pay in both mining and non-

mining firms.

Leverage have a significant negative

influence on the total compensation in

both mining and non-mining firms.

Growth has a significant negative

influence on the pay level of both mining

and non-mining firms in the Australian

context.

How Informative are Variance Risk Premium and Implied Volatility for

Value-at-risk Prediction? International Evidence

Introduction

the rapid growth of financial markets over the recent decades

and the recurrence of financial crises along with the development

of new and more sophisticated financial instruments have

reinforced the need for accurate and efficientvolatility forecasting

tools. Furthermore, the latent character of the actual stock

market volatility makes the forecasting exercise more challenging

• The VIX, publicly disseminated by the Chicago Board OptionExchange

(CBOE) and commonly referred to as the “world’s barom-eter of market

volatility”, was the first successful attempt at creating and implementing a

volatility index. Its success has pavedthe way for other marketplaces to build

their own implied volatilityindexes. The VIX relevance arises not only from its

forward-lookingnature, since it embeds market sentiment and/or investors

expectations about future states, but also because it forms the backbone of a

host of volatility derivatives, particularly variance swaps.The expected

premium from selling a stock market variance in aswap contract reflects the

variance risk premium as the difference between the expected realized

variance and its risk-neutral counterpart

• The current paper attempts to investigating the information content of both implied volatility

and variance risk premium in terms of forecasting the VaR for international stock market

indexes. More specifically, this paper aims to analyse and appraise the practical usefulness

of volatility estimates from various volatility forecasting methodologies including Risk Metrics,

implied volatility and GARCH models with and without implied volatility under the VaR

framework.

• This paper contributes to the literature in a number of ways. The first contribution is to further

account for the variance risk premium as a potential predictor, and to fairly compare its

performance to both implied volatility and time series models.

• The second contribution consists in expanding upon the financial literature regarding the

market risk modelling by performing a direct comparison of the forecasting performance of

implied volatility and variance risk premium measures across two groups of countries with

different development levels of derivatives markets.

Methodology

•Variance risk premium measures

•VaR backtesting

Empirical Result

markets (France, Germany, Japan, Netherlands,

Switzerland, UK and US) and five emerging markets (Hong

Kong, India, Mexico, South Africa and South Korea) are

employed, covering the geographical regions of Africa,

Asia, America and Europe. For each market, the dataset is

daily and it consists of implied volatility index and closing

price ofthe underlying stock market index, obtained from

Thomson Reuters Eikon. The continuously compounded

daily returns are calculatedas the logarithmic difference of

daily closing prices. The sampleperiod starts on January 3,

2000 for developed countries, while it varies for emerging

markets, as reflected in Table 1, depending onthe

availability of implied volatility data. All datasets end on

August 28, 2015.

• provides summary statistics for daily

index returns,implied volatility and

the estimated variance risk premium

over the full sample period. The

return series display similar

statistical properties with respect to

skewness and kurtosis. Most of

them exhibit negative skewness.

The deviations of the median from

the mean and the values of the

excess kurtosis justify the use of the

skewed and leptokurtic distribution-

based VaR.

• As expected, the VRP is positive on

average for most of the investigated

markets.Fig. 1 depicts the VRP for the

S&P500 and HSI indexes over the full

sample period. Looking at Fig. 1, two

things stand out immediately. First, VRP

is almost always positive and displays

pronounced spikesin uncertain

episodes. For both market indexes, the

largest spikes broadly coincide and they

are observed in the third quarter of 2002

following the Enron debacle, during the

Lehman aftermath in 2008 and also

following the euro area debt crisis at the

end of 2011.

• As shown in Table 3, except for few casesof

emerging markets including India, Mexico and South

Korea, all the empirical violation rates for the RM

model are significantly higher than the theoretical

value. Such findings suggest that the RM model

underestimates the true VaR for most of the

developed markets. Regarding the CC test, the

highest p-values are attributed to the standard

GARCH and its augmented specification with the

relative VRP in three and five out of twelve cases,

respectively. Moreover, for these two models, the

hypothesis of correct conditional coverage cannot be

rejected at standard significance levels for most of

the investigated markets. Hence, for the long

position VaR, the best performing model is the G-

RVRP followed by the GARCH, while both the RM

and implied volatility models (i.e.,IVM and G-IV)

exhibit the worst performance. The results emerging

from the estimated right quantile highlight the

predictabilityof the VaR for short trading position,

where most of the models perform accurately well.

• In the relatively less extreme case of 5%-VaR, we can

see, in Table 4, that both the RM and the implied

volatility models are out performed by the GARCH for

either long or short positions. Although the RM does a

fairly good job in modelling the VaR for most of the

markets, its performance deteriorates significantly

compared to that incurred for the 1%-VaR. Again, the

inclusion of the variance risk premium improves the

forecasting accuracy of the GARCH. The superiority of

the variance risk premium in combination with the

GARCH seems to be more pronounced on developed

markets, whereas the non-augmented GARCH is the

most relevant specification in capturing risk in emerging

markets. Taken together, the results of the G-RVRP and

the G-VRP are very close in terms of modelling positive

and negative returns for different ˛-VaR levels, but the G-

RVRP performs slightly better due to the level

dependency of the VRP

• overall number of the 1%-VaR violations during the

crisis period is consistent with that during the whole

sample period. The empirical failure rate is equal to the

promised probability, and the null hypothesis of correct

UC for the various VaR models and large quantiles

cannot be rejected. The excellent performance of all the

VaR models during this period of acute economic and

financial strain highlights the usefulness of modelling

large negative and positive returns with skewed and fat-

tailed distributions. Yet, for the less extreme 5%-quantile

• show that the forecasting performance of the VaR models

deteriorates during the crisis period, predominantly in the case

of developed markets. The significant increase in VaR violations

demonstrates that the VaR estimates during the global financial

crisis are underestimated. This is mainly induced by an

overreaction to bad news as most of the VaR violations are

found in the left quantile. The overreaction of investors is not

surprising during this turbulent period and makes the estimation

of long posi-tion risk more challenging. Nevertheless, emerging

markets seem to be affected to a much lesser extent by the

crisis, as evidenced by the high statistical accuracy of most of

the investigated models for both long and short positions

• Table 8 reports the Average Minimum Capital Requirements

(AMCR) over the forecasting period, using both VaR and

sVaR forecasts generated from the different models. The G-

IV generates significantly lower AMCR values than the

competing models in developed markets, except for long

position risk in Switzerland, albeit they are very close to

those induced by the IVM, and we cannot reject the

hypothesis of mean equality in most cases. The results show

that the implied volatility models incur substantial capital

savings for both long and short positions. The best

performing models regarding the acktesting results in Section

4.2 (i.e., GARCH and G-RVRP) are significantly less

demanding than the G-IV, in terms of capital requirements,

only when it comes to emerging markets. This is the case for

Mexico and South Africa for both long and short positions,

and for South Korea when it comes to provision against long

position risk. Interestingly, even in these cases, the G-IV

cannot be significantly outperformed.

Conclusion

• On the methodological side, we apply the RM, the GARCH and the standalone implied volatility model under the

skewed-t distribution. We separately include the implied volatility, the VRP and its relative form as additional regressors

into the GARCH model. To assess the performance of the daily VaR estimates, we use newly developed Monte Carlo-

based backtests with a key emphasis on the property of conditional efficiency for the violation process featuring both

unconditional efficiency and absence of clustering. The results support earlier evidence that GARCH models including

asymmetric and heavy-tailed distributions are quite useful in quantifying and predicting market risk seeing that the

statistical sufficiency is achieved effortlessly for most of the investigated markets.

• More importantly, we find that the accuracy of VaR forecasts can be significantly enhanced by accounting for the

variance risk effect, especially for long trading positions and most markedly by including the relative VRP into the

GARCH model rather than its level. The performance ranking appears remarkably stable across challenging trading

environments and alternative measures of the variance risk premium.