Market risk, value-at-risk and exponential weighting

• Authors: Udo Broll , Andreas Förster

Abstracts

EN

Banks and nfiancial intermediaries are exposed to market risk. The aim of the paper is to explore the implications of legal requirements on market risk valuation. The focus is on the calculation of the permissible weighting factor of the concept of value-at-risk (VaR). When measuring market risk, banks and nfiancial intermediaries may deviate from equally weighting historical data in their value-at-risk calculation and instead use an exponential time series weighting. eTh use of exponential weighting in the value-at-risk calculation is very popular because it takes into account changes in market volatility (immediately) and can therefore quickly adapt to VaR. In less volatile market phases this leads to a reduction in VaR and thus to lower own funds' requirements for banks and nfiancial intermediaries. However, in the exponential weighting a high volatility in the past is quickly forgotten and the VaR can be underestimated. To prevent this banks and nfiancial intermediaries are not completely free to choose a weighting (decay) factor. The exchange rate between Polish zloty and euro is used to estimate the value-at-risk as an example and exceptions to the general legal requirements are also discussed.

Keywords

EN

banks; nfiancial intermediaries; risk management; market risk; exponen tially weighted moving average; weighting scheme; value-at-risk

• Publisher: Uniwersytet Ekonomiczny w Poznaniu
• Journal: Economics and Business Review
• Year: 2022
• Volume: 8
• Issue: 2
• Pages: 80-91

Dates

published

2022

Contributors

author

Udo Broll

• Center of International Studies (ZIS), Faculty of Business and Economics, Technische Universität Dresden, Dresden, Germany

• https://orcid.org/0000000230362622

author

Andreas Förster

• Faculty of Business and Economics, Technische Universität Dresden, Dresden, Germany

• https://orcid.org/0000000294399598

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Identifiers

DOI

10.18559/ebr.2022.2.5

Biblioteka Nauki

2058071