
VAR “not to blame” for 1998 crisis, says leading academic
Some commentators have claimed that VAR measures – which define a maximum loss over a target horizon – encourage a vicious circle of position-cutting by traders when financial markets weaken sharply and banks struggle to maintain their regulatory capital ratios.
But Jorion, who is also the editor of The Journal of Risk, said his paper provides new evidence that VAR regulatory charges for commercial banks cannot be blamed for the volatility of 1998. The paper shows that: “Market risk charges move very slowly in response to changing market conditions due to the averaging over the last 60 days and slow updating imposed by Basel [capital adequacy] rules.”
For more on the Journal of Risk see: www.thejournalofrisk.com.
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