Research output: Contribution to journal › Article

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Journal | Risks |
---|---|

Date | Accepted/In press - 3 Sep 2018 |

Date | Published (current) - 7 Sep 2018 |

Issue number | 92 |

Volume | 6 |

Number of pages | 14 |

Pages (from-to) | 1-14 |

Original language | English |

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.

© 2018, The Author(s).

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

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