Professor Dominique Guégan, Emeritus Professor – University Paris1 Panthéon -Sorbonne, LabEx ReFi and Centre d’Economie de la Sorbonne will present a lecture on the following topic:
Financial Regulation: More Accurate Measurements for Control Enhancements and the Capture of the Intrinsic Uncertainty of the VaR
In this talk, we discuss the regulatory requirements (Basel Committee, ECB-SSM and EBA) to measure the major risks of financial institutions, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and issues observed when implementing one approach over another, the inconsistencies between the methodologies suggested and the goals required to achieve them. We analyze some dilemma around the notion of sub-additivity and its interest in terms of risk management.
In another hand, as risk managers and regulators pay little attention to the random behaviour of risk measures, in order to integrate this uncertainty, we provide a new way to build a robust parametric confidence interval (CI) of Value-at-Risk (VaR) for different lengths of samples. We compute this CI from a saddlepoint approximation of the distribution of VaR. Thus, we create a spectrum representation represented by an area that we use to define an alert indicator. We apply this methodology to risk management and stress testing providing an indicator of threats caused by events uncaptured in the traditional VaR methodology, which can lead to dramatic failures. Other new routes for risk measures are also proposed, like the distorsion approach.
All are invited to attend this kickoff lecture for the fall 2016 semester. Light refreshments will be served.