New study reveals flaws in market risk assessment, impacting capital requirements
The article shows that standard tests for measuring market risk using Value-at-Risk (VaR) models can be misleading because they don't consider estimation risk. The researchers developed a new method to correct this issue, providing more accurate and powerful tests for assessing market risk. Their approach was tested using a Monte Carlo study and applied to the S and P500 Index, demonstrating the importance of accounting for estimation risk in determining capital requirements.