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 previous year (250 observations) at the 99 per cent confidence 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 financial environment. Taking into serious consideration that high volatility periods are linked to a financial crisis, it is assumed that volatility could be an indicator for the financial environment representation. The conventional historical VaR back-tested results suggest that the specific methodology should be revised, especially during the high volatility period. For the newly suggested filtered VaR, the data sample is divided into several regimes depending on the volatility range. The filtered 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 findings regarding the current legislation framework suggest that the financial 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 filtered 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 fields of the financial analysis study.
Practical implications
The suggested methodology could present efficient 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 first paper that examines the Greek VaR legislation framework in detail.
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