On the Basel Liquidity Formula for Elliptical Distributions

Janine Balter and Alexander J. McNeil

Papers from arXiv.org

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 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.

Date: 2018-03
New Economics Papers: this item is included in nep-rmg
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