The value of Value-at-Risk: A theoretical approach to the pricing and performance of risk measurement systems

Zvi Wiener*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Risk-based capital adequacy requirements are the main tool employed by government regulators to assure bank stability. This approach allows banks to choose from a number of alternative methods for calculating the required capital. Many systems for measuring risk differ significantly in cost, precision, and in the potential " capital savings" . We develop a statistical model for evaluating risk measurement systems and optimizing the selection process. The model is based on queuing theory. The selection of the optimal system is a function of available capital, the volume and the character of bank activity. While the most precise system may lower a bank's minimal capital reserve requirements, it is not necessarily the optimal system once total costs are evaluated.

Original languageAmerican English
Pages (from-to)199-213
Number of pages15
JournalJournal of Economics and Business
Volume64
Issue number3
DOIs
StatePublished - May 2012

Keywords

  • Basel accord
  • Capital adequacy
  • Erlang formula
  • Financial institution regulation
  • Queuing theory
  • Risk measurement
  • Value-at-Risk (VaR)

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