Risk management of risk under the Basel Accord: forecasting value‐at‐risk of VIX futures

Purpose – The Basel II Accord requires that banks and other authorized deposit‐taking institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure value‐at‐risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realized losses exceed the estimated VaR. The purpose of this paper is to address the question of risk management of risk, namely VaR of VIX futures prices. Design/methodology/approach – The authors examine how different risk management strategies performed before, during and after the 2008‐2009 global financial crisis (GFC). Findings – The authors find that an aggressive strategy of choosing the supremum of the univariate model forecasts is preferred to the other alternatives, and is robust during the GFC. Originality/value – The paper examines how different risk management strategies performed before, during and after the 2008‐2009 GFC, and finds that an aggressive strategy of choosing the supremum of the univariate model forecasts is preferred to the other alternatives, and is robust during the GFC.