Title: Optimal Value-at-Risk reports: Reducing capital requirement with state dependent forecasting
Authors: Patrick Schmidt - Heidelberg Institute for Theoretical Studies, Goethe University Frankfurt (Germany) [presenting]
Abstract: The optimal risk reporting strategy for Value-at-Risk forecasts is investigated under the three-zone approach of capital requirement and back-testing as currently suggested by the Bank for International Settlements. We find that it is optimal to report overly conservative in times of low volatility and understate risk in times of high volatility. We characterize the class of state-dependent loss functions, which are consistent for the optimal strategy. In a simulation study, we compare the performance of commonly applied estimation strategies with the optimized estimation - based on the new class of loss functions - in terms of capital requirement.