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Volume 8 (22) Number 2 pp. 80-91

Udo Broll1, Andreas Förster2

1Center of International Studies (ZIS), Faculty of Business and Economics, Technische Universität Dresden, Dresden, Germany.
2
Faculty of Business and Economics, Technische Universität Dresden, Dresden, Germany.

Market risk, value-at-risk and exponential weighting

Abstract:

Banks and financial intermediaries are exposed to market risk. The aim of the paper is to explore the implications of legal requirements on market risk valuation. The focus is on the calculation of the permissible weighting factor of the concept of value-at-risk (VaR). When measuring market risk, banks and financial intermediaries may deviate from equally weighting historical data in their value-at-risk calculation and instead use an exponential time series weighting. The use of exponential weighting in the value-at-risk calculation is very popular because it takes into account changes in market volatility (immediately) and can therefore quickly adapt to VaR. In less volatile market phases this leads to a reduction in VaR and thus to lower own funds’ requirements for banks and financial intermediaries. However, in the exponential weighting a high volatility in the past is quickly forgotten and the VaR can be underestimated. To prevent this banks and financial intermediaries are not completely free to choose a weighting (decay) factor. The exchange rate between Polish zloty and euro is used to estimate the value-at-risk as an example and exceptions to the general legal requirements are also discussed.

pub/2022_2_80.pdf Full text available in Adobe Acrobat format:
http://www.ebr.edu.pl/volume22/issue2/2022_2_80.pdf
Keywords: banks, financial intermediaries, risk management, market risk, exponentially weighted moving average, weighting scheme, value-at-risk.

DOI: 10.18559/ebr.2022.2.5

For citation:

MLA Broll, Udo, and Andreas Förster. "Market risk, value-at-risk and exponential weighting." Economics and Business Review EBR 22.2 (2022): 80-91. DOI: 10.18559/ebr.2022.2.5
APA Broll, U., & Förster, A. (2022). Market risk, value-at-risk and exponential weighting. Economics and Business Review EBR 22(2), 80-91 DOI: 10.18559/ebr.2022.2.5
ISO 690 BROLL, Udo, FÖRSTER, Andreas. Market risk, value-at-risk and exponential weighting. Economics and Business Review EBR, 2022, 22.2: 80-91. DOI: 10.18559/ebr.2022.2.5