Study On The Procyclicality Of VaR Model In Market Risk Measurement

Abstract:The financial system has property of procyclicality, which refers to financial system operation is positively correlated with economic. The procyclicality amplifies economic fluctuations, and enhances the vulnerability of the financial system. More precisely, the procyclicality of bank system would magnify the systemic risk, weaken the effectiveness of banking supervision and monetary policy performance. At present, procyclicality is considered to be a priority problem in commercial bank supervision.The procyclicality of commercial banks generated from many aspects, one of them is the application of VaR model in market risk measurement. In this paper, we summarizes the mechanism of procyclicality, and focus on the VaR model which has been criticized for its possible procyclicality. We explore the correlation between price deviation and market risk. It provides risk prevention recommendation while market cycle changes. At last, an empirical study of countercyclical market risk metric is proposed. The main content of this paper is as fellow:Chapter I. It provides the research background and literature review.Chapter II. This chapter analyzes the meaning of procyclicality, and summarizes the mechanism and influences of bank procyclicality from four factors:Capital adequacy requirement, provision requirements for loan losses, Risk measurement, Fair value accounting rules.Chapter III. Using VaR as a risk metric tool could give rise to procyclicality. This chapter introduces VaR model and its procyclicality, including the definition and measurement of VaR, shortcomings and optimizations of VaR model, and the mechanism of VaR causing procyclicality.Chapter IV. In this part, we select asset price bubbles as an information variable which describes the state of price cycle. Then, we research how price deviation changes influences market risk through quantile regression model. It gives out an estimation of CVaR conditioned on price deviation changes.Chapter V. An empirical study of countercyclical market risk metric in china stock market based on BuVaR model is proposed. It provides a countercyclical risk metric for commercial bank capital regime.Chapter VI. It provides the summary of this paper.