It is needless to say that the importance of risk management for financial institutions has been increased so fast. And the VaR model is the most recently developed tool for managing market risk. Since JP. Morgan released to the public a new approach to risk management, "Riskmetrics", and Basle Committee allowed banks the option of using their own internal model to determine their capital charge, the VaR model has been increasingly used by banks. Considering the increasing trend of bank's using VaR it is essential to verify the VaR's ability to measure the market risk.
So, the purpose of this paper is to show the drawbacks of the VaR model in the period of the structural change of economy with an empirical test and to recommend counterplans. Korea had a tremendous economic shift during last three years, before and after the IMF's rescue financing periods. Therefore, I tried to test the rightness of the VaR with two different periods, that is, ①'before and after the IMF periods' which can be treated as a normal economy situation, ②'during IMF periods' as a period of the structural change of economy.
As a result of empirical test, distinct difference between IMF periods and non-IMF periods was found. During the IMF periods, the failure rate of the VaR measurement was as twice as that of non-IMF periods. And I verified the VaR with 'three zone approach' which is a VaR verifying method recommended by the Basle Committee. The result is that all non-IMF periods showed the "green zone", on the other hand 62.5% of the IMF periods showed the "yellow zone" and "red zone". In other words, It was turned out that the VaR model was not appropriate tool to measure the market risk during the period of the structural change of economy.
Finally, this paper recommends six counterplans against the drawbacks of the VaR model during the period of the structural change of economy. That is,
① set up the criteria of stress testing and enhance the availability of it.
② open the advantage and disadvantage of the VaR methods to the public.
③ use the conservative method of VaR measurement.
④ apply different multiplicative factor from the normal economy periods.
⑤ strengthen the control of the qualitative risk factor.
⑥ manage the market risk considering the connection with the credit risk.
And these counterplans should be selected to use by the characteristics of the portfolio and the organization.
