Regulatory-Optimal Funding

Chris Kenyon and Andrew Green

Papers from arXiv.org

Abstract: Funding is a cost to trading desks that they see as an input. Current FVA-related literature reflects this by also taking funding costs as an input, usually constant, and always risk-neutral. However, this funding curve is the output from a Treasury point of view. Treasury must consider Regulatory-required liquidity buffers, and both risk-neutral (Q) and physical measures (P). We describe the Treasury funding problem and optimize against both measures, using the Regulatory requirement as a constraint. We develop theoretically optimal strategies for Q and P, then demonstrate a combined approach in four markets (USD, JPY, EUR, GBP). Since we deal with physical measures we develop appropriate statistical tests, and demonstrate highly significant (p

Date: 2013-10, Revised 2014-08
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Published in Risk, 2014, 27(4), 64-69

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1310.3386

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