On the Basel Liquidity Formula for Elliptical Distributions

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JournalRisks
DateAccepted/In press - 3 Sep 2018
DatePublished (current) - 7 Sep 2018
Issue number92
Volume6
Number of pages14
Pages (from-to)1-14
Original languageEnglish

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.

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© 2018, The Author(s).

    Research areas

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

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