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<p>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.</p>
</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.

Market risk, value-at-risk and exponential weighting

Economics and Business Review

This work is licensed under the Creative Commons Attribution 4.0 International License.

{"article-title":"Market risk, value-at-risk and exponential weighting"}

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...

Market risk, value-at-risk and exponential weighting

Data publikacji: 18 lip 2022

Zakres stron: 80 - 91

Otrzymano: 24 lut 2022

Przyjęty: 25 cze 2022

DOI: https://doi.org/10.18559/ebr.2022.2.5

Słowa kluczowe
banks, financial intermediaries, risk management, market risk, exponentially weighted moving average, weighting scheme, value-at-risk

© 2022 Udo Broll et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Market risk, value-at-risk and exponential weighting

Data publikacji: 18 lip 2022

Zakres stron: 80 - 91

Otrzymano: 24 lut 2022

Przyjęty: 25 cze 2022

DOI: https://doi.org/10.18559/ebr.2022.2.5

Słowa kluczowebanks, financial intermediaries, risk management, market risk, exponentially weighted moving average, weighting scheme, value-at-risk

© 2022 Udo Broll et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Słowa kluczowe
banks, financial intermediaries, risk management, market risk, exponentially weighted moving average, weighting scheme, value-at-risk