Econometric models used for managing the market risk in the Romanian banking system
Econometric models used for managing the market risk in the Romanian banking system

Summary/Abstract: Taking into account that one of the most important factors which have caused the financial crisis was the bad risk management practices in banks we want to confirm the need to develop more efficient risk management practices. The fact that return distributions are characterized by time varying volatility poses some challenges in the estimation, especially in the period of severe financial crisis. In order to remedy this problem we propose the Extreme Value Theory as an alternative to VaR for quantifying the banks’ exposures to interest rate risk. EVT models are more robust to fat-tailedness in the conditional distribution of returns and are preferred in the modeling of interest rate risk in periods with extreme variations. Finally, we assess the performance of the model analyzing the interest rate risk on the Romanian inter-bank market by measures that address its conservativeness, accuracy and efficiency, in the context of Basel II principles.

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