Hello John,

Thanks for the lead. I have seen other papers on this topic.

Vince

 -----Original Message-----
From: 	"John D. Martin" <J_Martin@baylor.edu>@ENRON [mailto:IMCEANOTES-+22John+20D+2E+20Martin+22+20+3CJ+5FMartin+40baylor+2Eedu+3E+40ENRON@ENRON.com] 
Sent:	Thursday, August 09, 2001 9:01 AM
To:	Kaminski, Vince J
Subject:	Have you seen this?


"Incorporating Event Risk into Value-at-Risk"

      BY:  MICHAEL S. GIBSON
              Board of Governors of the Federal Reserve System
              Division of Research and Statistics
Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=268849

           Other Electronic Document Delivery:
           http://www.federalreserve.gov/pubs/workingpapers.htm
           SSRN only offers technical support for papers
           downloaded from the SSRN Electronic Paper Collection
           location. When URLs wrap, you must copy and paste
           them into your browser eliminating all spaces.

Paper ID:  FEDS Discussion Paper No. 2001-17
    Date:  February 2001

 Contact:  MICHAEL S. GIBSON
   Email:  Mailto:michael.s.gibson@frb.gov
  Postal:  Board of Governors of the Federal Reserve System
           Division of Research and Statistics
           Mail Stop 91
           20th and Constitution Avenue NW
           Washington, DC 20551  USA
   Phone:  1-202-452-2495
     Fax:  1-202-452-6424

Paper Requests:
 Please indicate the title and the FEDS paper number. Single
 copies of FEDS papers may be obtained upon request from Ms.
 Karen Blackwell, Mailto:fedspapers@frb.gov Postal: Mail Stop 77,
 Federal Reserve Board, Washington, DC 20551. Phone:(202)
 452-2900. Fax:(202) 452-3819.

ABSTRACT:
 Event risk is the risk that a portfolio's value can be affected
 by large jumps in market prices. Event risk is synonymous with
 "fat tails" or "jump risk". Event risk is one component of
 "specific risk", defined by bank supervisors as the component of
 market risk not driven by market-wide shocks. Standard
 Value-at-Risk (VaR) models used by banks to measure market risk
 do not do a good job of capturing event risk. In this paper, I
 discuss the issues involved in incorporating event risk into
 VaR. To illustrate these issues, I develop a VaR model that
 incorporates event risk, which I call the Jump-VaR model. The
 Jump-VaR model uses any standard VaR model to handle "ordinary"
 price fluctuations and grafts on a simple model of price jumps.
 The effect is to "fatten" the tails of the distribution of
 portfolio returns that is used to estimate VaR, thus increasing
 VaR. I note that regulatory capital could rise or fall when
 jumps are added, since the increase in VaR would be offset by a
 decline in the regulatory capital multiplier on specific risk
 from 4 to 3. In an empirical application, I use the Jump-VaR
 model to compute VaR for two equity portfolios. I note that, in
 practice, special attention must be paid to the issues of
 correlated jumps and double-counting of jumps. As expected, the
 estimates of VaR increase when jumps are added. In some cases,
 the increases are substantial. As expected, VaR increases by
 more for the portfolio with more specific risk.

 Keywords: Specific risk, market risk, jump risk, jump
 diffusion, default risk


JEL Classification: G10, G28

John D. Martin
Carr P. Collins Chair in Finance
Finance Department
Baylor University
PO Box 98004
Waco, TX 76798
254-710-4473 (Office)
254-710-1092 (Fax)
J_Martin@Baylor.edu
web:    http://hsb.baylor.edu/html/martinj/home.html