Value-at-Risk of Commercial Banks in Canada and the United States

Abstract

This project aims to study the Value-at-Risk (VaR) of commercial banks in the United states and Canada with respect to changes in three risk factors which include a market index, exchange rate, and monetary policy and interest rates. The model allows for comparing different banks’ risk in different countries. We employ weekly data on the S&P 500 index as a proxy for the US financial market and the S&P/TSX Composite index as a proxy for the Canadian financial market; as well as the three months’ treasury bill rates for both US and Canada to test for the banks’ risk exposure to changes in monetary policy and interest rates and the USD/CAD exchange rate to test for the banks’ exposure to foreign exchange risk between the two countries. A 99% confidence interval is chosen so that the results obtained would be statistically significant. Results indicated that both banks, JP Morgan Chase & Co. bank and Royal Bank of Canada, have low risk of losing their value within a week of extreme changes in the variables mentioned.