Commercial Bank's Market Risk Measurement And Model Choice

Chinese economy depends on indirect finance excessively, and indirect finance develops slowly. Such financial structure impairs the ability to diversify financial risk in our country, and has inherited fragility. Moreover, such structure makes against the long-term development of our national economy, therefore increase the proportion of direct finance is our strategic choice.According to functional perspective of financial theory, the division of financial industries is relative and dynamic, and the institutions' form, business and products of the industry are variable, while the fundamental function of financial industry is invariable. According the developing trend of international financial industry, the traditional boundary of industry is becoming vague, the global mixed operation trend is realization of comparative cost theory in reconstruction of financial market, and is the inevitable result of market development. Nowadays, banking sector plays overwhelming role in our financial system due to their scale and strength, therefore commercial banks have tremendous advantage to provide direct finance service, and will become dominant role in the process from divided-operation to mixed-operation.Mixed operation will expand commercial banks' business, meanwhile the economy is becoming more market-direct, more and more market risk confront the banks. To be survive in such circumstance, financial institution must manage their market risk effective, consequently, there are plenty of concerned provision in Basel Accord.The first step to control risk is to measure it. VaR (value at risk), was created as risk measure and manage tool. Compared with traditional risk management tools, VaR has some matchless advantages. Market risk of various portfolio and institution could simplify to a single number with model of VaR, consequently VaR makes managers understand the maximum risk of their portfolio on a certain horizon. VaR is applied by various kinds of financial institution, regulatory institution and multi-nationalcompanies. However, the research of VaR is less than a decade; moreover the application of VaR is rare in China. So, in this paper, I introduce VaR model systemically, at first. Secondly, I attempt to measure the market risk of probable forthcoming portfolio of commercial banks. In a word, I want help the progress of measure and manage of risk for commercial banks.This paper can be divided into five chapters. The first chapter introduces the financial structure and reform, in order to improve commercial-bank oriental mixed operation is perspective direction of financial system in China. Mixed operation will bring commercial banks about various kind of business, meanwhile, the interest rate and exchange rate will be market-driven. All of these challenge the banks' market risk management. With the implement of Basel Accord, VaR model has become the most important means to measure the market risk.Second chapter introduce the way to measure commercial banks' market risk. In part one of this chapter, we present Amendment to the Capital Accord to Incorporate Market Risk; while in second part the Guideline on Commercial Banks' market risk management is recommended.Third chapter introduce the origination, development, status of VaR. VaR model came to being while the market risk increase gradually in international market. Nowadays, more and more institutions accept the method, and VaR applied around world. Then, we illustrates the definition of VaR and some calculation of it, such delta-gamma, Historical simulation, Structured Monte Carlo. With deeply research of VaR, the series of new theory come to being on the base of estimating theory, such as calculation based on skewness and kurtosis. At last of this chapter we introduce VaR backtest method. The principle of backtest is test the frequency of fail rate. There two backtest method, one is by Kupiec in 1995, the other one is following the Basel Committee rule.The fourth chapter is perspective commercial banks' portfolio market risk measurement. We choose four underlie assets which are represented byCITICS&STANDARD POOR 300 index, CITICS fund index, CITICS treasure bill index and portfolio constructed by the three index . we have finished the empirical study on the four asset with three VaR models respectively, and compared the suitability of three above mentioned models synthetically.In last chapter, we compare and contrast the application of three models, according to their results and status of commercial banks in China.