Stability of the Correlation Between Book and Market Value at Risk as a Measure of Banks' Information Transparency

Abdoh Tabrizi, Hossein; Tehrani, Reza; Baghani, Ali

doi:10.61186/ijf.2024.434870.1456

Stability of the Correlation Between Book and Market Value at Risk as a Measure of Banks' Information Transparency

Document Type : Original Article

Authors

Hossein Abdoh Tabrizi ¹

Reza Tehrani ²

Ali Baghani ³

¹ Visiting Prof., Faculty of Management and Accounting, Sharif University of Technology, Tehran, Iran.

² Prof., Department of Financial engineering, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

³ Assistant Prof., Department of Accounting and Finance, South Tehran Branch, Islamic Azad University, Tehran, Iran.

10.61186/ijf.2024.434870.1456

Abstract

One of the main demands of investors (depositors and shareholders) of banks is transparency. However, in addition to the requirements for meeting this demand, measuring how to meet it has become challenging. So far, researchers have proposed different qualitative criteria for transparency. In this study, while introducing the correlation coefficient between book and market value at risk (VaRs) as a criterion of transparency, we seek to examine the stability of this criterion in different economic conditions. For this purpose, first, by using the e-garch model, the value at risk was estimated based on the balance sheet (book) information and also the market information of the banks' shares, then by calculating the correlation coefficients between book and market VaR’s under normal conditions, we predict book and market VaR’s using vector auto-regressive (VAR) models, along with defining three stress scenarios (Mild - Severe - hyper stress). We examined the significance of the difference between the calculated correlation coefficients in the three stress test modes. We thus tested the stability of the correlation coefficient of the defined scenarios. The findings showed that except for the correlation caused by the unemployment rate factor in mild and hyper-stress scenarios, in other cases, no evidence of H0 rejection was found, indicating the stability of the correlation coefficient between book and market VaRs as a measure of transparency.

Keywords

Information Transparency

Value at Risk (VaR)

Vector Auto-Regressive Model (VAR)

Correlation Coefficient

Stress Test

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