On the Basel Liquidity Formula for Elliptical Distributions

Janine Balter and Alexander J. McNeil
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Janine Balter: Deutsche Bundesbank, 40212 Düsseldorf, Germany
Alexander J. McNeil: The York Management School, University of York, Freboys Lane, York YO10 5GD, UK

Risks, 2018, vol. 6, issue 3, 1-13

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.

Keywords: Basel Accords; liquidity risk; risk measures; expected shortfall; elliptical distributions; generalized hyperbolic distributions (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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