Value-at-Risk (VaR) Computations Under Various VaR Models and Stress Testing

SUMMARY

Bank for International Settlements (BIS) proposes that all banks calculate and report amount of market risk they incur and allocate sufficient amount of capital starting at the beginning of year 2002. BIS also suggests that value-at-risk (VaR) models in computing market risk should be used. The Turkish Bank Regulation and Supervision Agency already required all Turkish banks to compute and periodically report market risk and reserve adequate amount of capital since January, 2002. This study mimics an average trading marketable securities portfolio subject to market risk of the four largest Turkish banks. The publicly available quarterly financial reports of year 2001 for Isbank, Garanti, Yapi Kredi and Akbank are examined, and a mimicking portfolio composition is determined as bond investments; 60% in Turkish currency (TRL), 20% in American dollar (USD) and 20%in Euro (EUR). The VaR amounts of the mimicking portfolio are computed by applying Historical Simulation, Monte Carlo Simulation, Delta-Normal and Standard Methods. Finally, stress test is applied for each of the models by using crisis scenarios. The Turkish financial crises of November 2000 and February 2001 are simulated as stress scenarios. The results of stress testing reveal that all methods except standard method can stand the crisis in November 2000, but none of the models can stand the crisis in February 2001.

KEYWORDS:

• International banking
• international settlements
• BIS
• market risk
• value-at-risk
• Turkish Bank Regulation and Supervision Agency
• Turkish banks