On the Basel Liquidity Formula for Elliptical Distributions

Alexander John McNeil; Janine Christine Balter

doi:10.3390/risks6030092

On the Basel Liquidity Formula for Elliptical Distributions

Alexander John McNeil, Janine Christine Balter

Management

Research output: Contribution to journal › Article › peer-review

Abstract

A justification of the Basel liquidity formula for risk capital in the trading book is given under the assumption that market risk-factor changes form a Gaussian white noise process over 10-day time steps and changes to P&L (profit-and-loss) are linear in the risk-factor changes. A generalization of the formula is derived under the more general assumption that risk-factor changes are multivariate elliptical. It is shown that the Basel formula tends to be conservative when the elliptical distributions are from the heavier-tailed generalized hyperbolic family. As a by-product of the analysis, a Fourier approach to calculating expected shortfall for general symmetric loss distributions is developed.

Original language	English
Pages (from-to)	1-14
Number of pages	14
Journal	Risks
Volume	6
Issue number	92
DOIs	https://doi.org/10.3390/risks6030092
Publication status	Published - 7 Sept 2018

Bibliographical note

Keywords

Basel Accords; liquidity risk; risk measures; expected shortfall; elliptical distributions; generalized hyperbolic distributions

Access to Document

10.3390/risks6030092

Balter-McNeil-18-revision
© 2018, The Author(s).
Final published version, 291 KBLicence: CC BY

Cite this

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