A Note on Estimating Market-based Minimum Capital Risk Requirements: A Multivariate GARCH Approach

Internal risk management models of the kind popularized by J. P. Morgan are now used widely by the world’s most sophisticated financial institutions as a means of measuring risk. Using the returns on three of the most popular futures contracts on the London International Financial Futures Exchange,...

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Bibliographic Details
Published in:The Manchester school 2002-09, Vol.70 (5), p.666-681
Main Authors: Brooks, C., Clare, A. D., Persand, G.
Format: Article
Language:English
Subjects:
Capital market
Data analysis
Economic models
Economic theory
Economics
Futures
Futures exchanges
Mathematical methods
Measurement
Risk
Risk management
Stochastic models
Studies
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Summary:Internal risk management models of the kind popularized by J. P. Morgan are now used widely by the world’s most sophisticated financial institutions as a means of measuring risk. Using the returns on three of the most popular futures contracts on the London International Financial Futures Exchange, in this paper we investigate the possibility of using multivariate generalized autoregressive conditional heteroscedasticity (GARCH) models for the calculation of minimum capital risk requirements (MCRRs). We propose a method for the estimation of the value at risk of a portfolio based on a multivariate GARCH model. We find that the consideration of the correlation between the contracts can lead to more accurate, and therefore more appropriate, MCRRs compared with the values obtained from a univariate approach to the problem.
ISSN:1463-6786
1467-9957
DOI:10.1111/1467-9957.00319