A note on estimating market–based minimum capital risk requirements: a multivariate GARCH approach
Brooks, C., Clare, A.D. and Persand, G. (2002) A note on estimating market–based minimum capital risk requirements: a multivariate GARCH approach. The Manchester School, 70 (5). pp. 666-681. ISSN 1467-9957
To link to this article DOI: 10.1111/1467-9957.00319
Internal risk management models of the kind popularized by J. P. Morgan are now used widely by the world’s most sophisticated financial institutions as a means of measuring risk. Using the returns on three of the most popular futures contracts on the London International Financial Futures Exchange, in this paper we investigate the possibility of using multivariate generalized autoregressive conditional heteroscedasticity (GARCH) models for the calculation of minimum capital risk requirements (MCRRs). We propose a method for the estimation of the value at risk of a portfolio based on a multivariate GARCH model. We find that the consideration of the correlation between the contracts can lead to more accurate, and therefore more appropriate, MCRRs compared with the values obtained from a univariate approach to the problem.