Author: Chen, Xiaoyi
Author: Zheng, Duo
This research paper analyzes the internal Value-at-Risk (VAR) models of the “Big Five” Canadian commercial banks by empirically investigating the banks‟ actual non-anonymous daily VAR and profit-and-loss (P&L) data. These data points were extracted from graphs included in the banks‟ own annual report, Out of the 4340 trading days analyzed in this study, there are 47 exceptions (days when the actual loss exceeds the disclosed VAR); whereas, the expected figure is 43 exceptions at a 99% confidence interval. During a financial crisis, as is the case for the study‟s time line, this internal VAR model demonstrates an inconsistent result among our sample banks. For example, the number of exceptions was found to be significantly variable between banks, with two banks, BMO and RBC, experiencing 26 and 16 exceptions respectively, while BNS and TD only have one day with a loss exceeding the VAR. We doubt whether the internal model precisely evaluate VAR, so we conduct alternative method such as Historical simulation model and GARCH(1,1) model to calculate the banks‟ VAR, we conclude Historical simulation model is best among those models based on the test results.
FRM Project-Simon Fraser University
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