An Introduction to Value-at-Risk Modelling

Speaker: John MIzanski.

Affiliation: TD Bank

In 1996 the Basel Committee on Banking Supervision provided an amendment to the 1988 Capital Accord which focused on the incorporation of market risks into the capital requirements. A significant component of this amendment was, for the first time, the inclusion of provisions and standards for banks to develop internal value-at-risk models for measuring these market risks. Over the years these standards have, and continue to evolve. The 2006 publication “Basel II: International Convergence of Capital Measurement and Capital Standards – Comprehensive Version” provides the current standards through to 2019 when the next set of standards, released in January 2016, come into effect. Following a brief overview of bond valuation models and the market risk variables, we introduce the value-at-risk measure and the common methodologies adopted in modelling market risks. Finally we examine some of the difficulties that arise, particularly with data, and where the standards are moving in the future.