The relevance of value‐at‐risk disclosures: evidence from the LTCM crisis
| DOI | https://doi.org/10.1108/13581980610659486 |
| Published date | 01 April 2006 |
| Date | 01 April 2006 |
| Pages | 174-184 |
| Author | Niranjan Chipalkatti,Vinay Datar |
| Subject Matter | Accounting & finance |
FEATURE ARTICLE
The relevance of value-at-risk
disclosures: evidence from the
LTCM crisis
Niranjan Chipalkatti and Vinay Datar
Albers School of Business and Economics, Seattle University, Seattle,
Washington, USA
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 Disclosure, Valueanalysis, Capital
Paper type Viewpoint
1. Objective of study
Previous studies have established that the failure of the hedge fund, long-term capital
management (LTCM), was associated with significant negative abnormal returns for a
many US banks (Kabir and Hassan, 2005; Kho et al., 2000) especially around the critic al
event date of September 2, 1998 when LTCM announced its precarious situation. This
study attempts to examine whether the bank value-at-risk (VaR) disclosures were used
by investors to assess the potential trading loss that a bank could suffer in the third
quarter of 1998. Specifically, the study examines whether there was any association
between disclosed VaR and the magnitude of abnormal returns and abnormal trading
volume surrounding the key LTCM event date for a sample of US bank holding
companies. VaR disclosures are costly to prepare and complex to interpret. To the
extent that the results indicate that there was such an association between the
magnitude of VaR and the abnormal reaction around LTCM events, the study will
The current issue and full text archive of this journal is available at
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This paper was presented at the XIII Academy of Business and Administrative Sciences
International Conference held on July 20-22, 2005, Quebec City, Quebec, Canada.
JFRC
14,2
174
Journal of Financial Regulation and
Compliance
Vol. 14 No. 2, 2006
pp. 174-184
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980610659486
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