Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56714
Authors: 
Sabiwalsky, Ralf
Year of Publication: 
2012
Series/Report no.: 
SFB 649 discussion paper 2012-008
Abstract: 
Basel II Pillar 3 reports provide information about banks' exposure towards a number of risk factors, such as corporate credit risk and interest rate risk. Previous studies find that the quality of such information is likely to be weak. We analyze the marginal contribution of pillar 3 exposure data to the quality of equity volatility forecasts for individual banks. Our method uses (local in time) measures of risk factor risk using a multivariate stochastic volatility model for five risk factors, and uses measures of bank sensitivity with respect to these risk factors. We use two sets of sensitivity measures. One takes into account pillar 3 information, and the other one does not. Generally, we generate volatility forecasts as if no market prices of equity were available for the bank the forecast is made for. We do this for banks for which such data is, in fact, available so that we can conduct ex post - tests of the quality of volatility forecasts. We find that (1) pillar 3 information allows for a better-than-random ranking of banks according to their risk, but (2) pillar 3 exposure data does not help reduce volatility forecast error magnitude.
Subjects: 
risk reporting
stochastic volatility
risk factors
JEL: 
G17
G21
Document Type: 
Working Paper

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