Morgan Stanley’s average trading Value-at-Risk (VaR) measured at the 95% confidence level was $63 million compared with $76 million in second quarter of 2012 and $99 million in the third quarter of the prior year. The Firm modified its VaR model this quarter to make it more responsive to recent market conditions.
The old VaR model can be compared with the new one in Morgan Stanley’s financial supplement.
Morgan Stanley CFO Ruth Porat says that the change is actually a relatively simple one. The bank says it went from a model that was more weighted to a four-year horizon (all the way back to 2008) to one that was weighted more towards a one-year horizon (all the way back to, erm, 2008). A simple change, with rather significant results.
Some hastily-assembled charts in lovely shades of pink and baby blue below.
Total trading VaR:
Credit Portfolio VaR:
And Interest Rate VaR:
In all three categories average VaR is much reduced under the new model – and in the interest rate category the effect is so pronounced that VaR actually decreases between Q2 and Q3 of this year, instead of increasing under the old model.
Morgan Stanley was keen to add that:
The model has been approved by the Firm’s regulators for use in the Firm’s regulatory capital calculations. VaR has been recast for all periods to reflect this enhancement.
Well that’s ok then.
New regulator prepared to be unpopular – FT
Modelling: normal distribution is not always the norm - FT