Overview of the Greek value at risk (VaR) legislation framework. Deficiencies, proposals for future revision and a new suggested method

Author:Evangelos Vasileiou
Position:Department of Business Administration, University of the Aegean, Chios, Greece
Pages:213-226
SUMMARY

Purpose The purpose of this paper is to present the Greek value at risk (VaR) legislation framework and to highlight some of its major deficiencies, using not only theoretical scenarios but also empirical evidence. Moreover, this paper does not only highlight the VaR legislation’s framework deficiencies but also suggests legal interventions for its revision and a new-alternative, flexible and simple-to-be-applied filtered estimation method which improves the VaR evaluations. Design/methodology/approach The Greek legislation framework suggests that for the daily VaR to be estimated, a minimum data set of the... (see full summary)

 
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Overview of the Greek value at
risk (VaR) legislation framework
Deciencies, proposals for future revision
and a new suggested method
Evangelos Vasileiou
Department of Business Administration, University of the Aegean, Chios, Greece
Abstract
Purpose – The purpose of this paper is to present the Greek value at risk (VaR) legislation framework
and to highlight some of its major deciencies, using not only theoretical scenarios but also empirical
evidence. Moreover, this paper does not only highlight the VaR legislation’s framework deciencies but
also suggests legal interventions for its revision and a new-alternative, exible and simple-to-be-applied
ltered estimation method which improves the VaR evaluations.
Design/methodology/approach – The Greek legislation framework suggests that for the daily VaR to
be estimated, a minimum data set of the previous year (250 observations) at the 99 per cent condence level
should be considered. This approach may lead to inaccurate VaR estimations, for example, when after a
long-term growth period, there is a sudden recession period, because the data input is not representative to
the current nancial environment. Taking into serious consideration that high volatility periods are linked to
a nancial crisis, it is assumed that volatility could be an indicator for the nancial environment
representation. The conventional historical VaR back-tested results suggest that the specic methodology
should be revised, especially during the high volatility period. For the newly suggested ltered VaR, the data
sample is divided into several regimes depending on the volatility range. The ltered VaR estimation process
applies the conventional historical methodology but uses different historical data input depending on the
current volatility. This new approach improves the VaR estimation by reducing the VaR daily violations.
Findings – The ndings regarding the current legislation framework suggest that the nancial analysts in
Greece have a motivation to adopt a relative VaR approach for risk asset class portfolios (e.g. Greek domestic
equity mutual funds), which enables them to bear increased risk without presenting it to the investors. For
lower risk portfolios, the absolute VaR may be useful for increased risk bearing strategies. The stricter VaR
approaches are preferred to be adopted because stricter VaR estimations are linked to a reduced number of
violations. The ltered volatility approach improves the VaR estimations (fewer violations are relative to the
conventional approach).
Research limitations/implications This methodology is designed to be applied for the VaR
estimation, but it could be partly applied in other elds of the nancial analysis study.
Practical implications – The suggested methodology could present efcient VaR estimation without
using sophisticated procedures or expensive VaR systems. Therefore, it could be easily applied by the risk
analysts. Moreover, the overview of the Greek legislation’s framework could be useful not only for the Greek
regulators but also for the authorities in countries with a similar regulation.
Originality/value – The newly proposed methodology is so accurate and simple to apply that it could
have far-reaching impact on practitioners. Finally, this is the rst paper that examines the Greek VaR
legislation framework in detail.
Keywords Financial reporting, Financial crisis, Financial regulation, Capital markets,
Regulatory risk, Value-at-risk
Paper type Research paper
Tassos Sioris and Andreas Pigkos R.I.P.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
Greek value at
risk (VaR)
legislation
213
Journalof Financial Regulation
andCompliance
Vol.24 No. 2, 2016
pp.213-226
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-08-2015-0043

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