Evaluation of Foreign Exchange Risk Capital Requirement Models
Claudio H. da S. Barbedo (),
Gustavo Araujo (),
João Maurício S. Moreira () and
Ricardo S. Maia Clemente ()
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Claudio H. da S. Barbedo: Departamento de Estudos e Pesquisas do Banco Central do Brasil
João Maurício S. Moreira: Departamento de Estudos e Pesquisas do Banco Central do Brasil
Ricardo S. Maia Clemente: Departamento de Estudos e Pesquisas do Banco Central do Brasil
Brazilian Review of Finance, 2005, vol. 3, issue 2, 223-249
This paper examines capital requirement for financial institutions in order to cover market risk stemming from exposure to foreign currencies. The models examined belong to two groups according to the approach involved: standardized and internal models. In the first group, we study the Basel model and the model adopted by the Brazilian legislation. In the second group, we consider the models based on the concept of value at risk (VaR). We analyze the single and the double-window historical model, the exponential smoothing model (EWMA) and a hybrid approach that combines features of both models. The results suggest that the Basel model is inadequate to the Brazilian market, exhibiting a large number of exceptions. The model of the Brazilian legislation has no exceptions, though generating higher capital requirements than other internal models based on VaR. In general, VaR-based models perform better and result in less capital allocation than the standardized approach model applied in Brazil.
Keywords: capital requirements; Basle agreement; market risk; VaR; currency risk (search for similar items in EconPapers)
JEL-codes: E58 G18 G28 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:3:y:2005:i:2:p:223-249
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