The relevance of value‐at‐risk disclosures: evidence from the LTCM crisis
Journal of Financial Regulation and Compliance
ISSN: 1358-1988
Article publication date: 1 April 2006
Abstract
Purpose
Previous studies have established that the failure of the hedge fund, long‐term capital management (LTCM), was associated with significant negative abnormal returns for many US banks, especially around September 2, 1998, when LTCM announced its failure. This study attempts to examine whether bank value‐at‐risk (VaR) disclosures were used by investors to assess the potential trading loss that a bank could suffer at that time.
Design/methodology/approach
This study examines whether there was any association between disclosed VaR and the magnitude of abnormal returns and trading volume surrounding the announcement date.
Findings
The results indicate that there was no such association which suggests that investors did not use the VaR information to assess the potential trading losses of exposed banks. Banks that formed part of the LTCM bailout consortium and those with larger amounts of notional derivatives faced the largest negative reaction at the time of the failure announcement.
Originality/value
VaR disclosures are costly to prepare and complex to interpret. The study finds no benefits of VaR disclosures to bank investors.
Keywords
Citation
Chipalkatti, N. and Datar, V. (2006), "The relevance of value‐at‐risk disclosures: evidence from the LTCM crisis", Journal of Financial Regulation and Compliance, Vol. 14 No. 2, pp. 174-184. https://doi.org/10.1108/13581980610659486
Publisher
:Emerald Group Publishing Limited
Copyright © 2006, Emerald Group Publishing Limited