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Fundamental review of the trading book - The new approach to measure market risk

Drakenberg, Jonas LU and Hegnell, Samuel (2017) NEKN01 20171
Department of Economics
Abstract
The Fundamental Review of the Trading Book sets the standard for the most recent regulatory framework for minimum capital requirement within market risk. It will be implemented gradually up until 2019 and will overhaul a major part of the current regulation. More specifically it will cause financial institutions to estimate risk with Expected Shortfall instead of Value-at-Risk and add a new way of treating varying liquidity among assets.
This research looks into the new framework by evaluating three different indices. The values of Expected Shortfall and Value-at-Risk are compared and possible effects that the new framework has on minimum capital requirement for market risk are explored. To estimate risk, both parametric estimation... (More)
The Fundamental Review of the Trading Book sets the standard for the most recent regulatory framework for minimum capital requirement within market risk. It will be implemented gradually up until 2019 and will overhaul a major part of the current regulation. More specifically it will cause financial institutions to estimate risk with Expected Shortfall instead of Value-at-Risk and add a new way of treating varying liquidity among assets.
This research looks into the new framework by evaluating three different indices. The values of Expected Shortfall and Value-at-Risk are compared and possible effects that the new framework has on minimum capital requirement for market risk are explored. To estimate risk, both parametric estimation approaches as well as a non-parametric estimation approach are utilized. In order to calculate the minimum capital requirement, the regulatory framework set out by the Basel Committee on Banking Supervision is utilized. To evaluate the changes in the regulatory framework of the Fundamental Review of the Trading Book we compare it with the previous regulations Basel I, Basel II and Basel II.5.
The study finds evidence for the change of risk measure having an impact on the estimated riskiness of the evaluated assets. What the study finds to be seemingly most important in the new regulatory framework is the inclusion of varying liquidity horizons. Evidence for longer liquidity horizons causing the capital requirement to increase relative to previous regulation is presented. Finally, the minimum capital requirement under the Fundamental Review of the Trading Book show apparent signs of being less pro-cyclical. (Less)
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author
Drakenberg, Jonas LU and Hegnell, Samuel
supervisor
organization
course
NEKN01 20171
year
type
H1 - Master's Degree (One Year)
subject
keywords
Expected Shortfall, Value-at-Risk, Fundamental Review of the Trading Book, Bank for International Settlements, Basel Committee on Banking Supervision, Market risk, Parametric approach, Non-parametric approach
language
English
id
8912462
date added to LUP
2017-07-10 13:54:30
date last changed
2017-07-10 13:54:30
@misc{8912462,
  abstract     = {The Fundamental Review of the Trading Book sets the standard for the most recent regulatory framework for minimum capital requirement within market risk. It will be implemented gradually up until 2019 and will overhaul a major part of the current regulation. More specifically it will cause financial institutions to estimate risk with Expected Shortfall instead of Value-at-Risk and add a new way of treating varying liquidity among assets. 
This research looks into the new framework by evaluating three different indices. The values of Expected Shortfall and Value-at-Risk are compared and possible effects that the new framework has on minimum capital requirement for market risk are explored. To estimate risk, both parametric estimation approaches as well as a non-parametric estimation approach are utilized. In order to calculate the minimum capital requirement, the regulatory framework set out by the Basel Committee on Banking Supervision is utilized. To evaluate the changes in the regulatory framework of the Fundamental Review of the Trading Book we compare it with the previous regulations Basel I, Basel II and Basel II.5. 
The study finds evidence for the change of risk measure having an impact on the estimated riskiness of the evaluated assets. What the study finds to be seemingly most important in the new regulatory framework is the inclusion of varying liquidity horizons. Evidence for longer liquidity horizons causing the capital requirement to increase relative to previous regulation is presented. Finally, the minimum capital requirement under the Fundamental Review of the Trading Book show apparent signs of being less pro-cyclical.},
  author       = {Drakenberg, Jonas and Hegnell, Samuel},
  keyword      = {Expected Shortfall,Value-at-Risk,Fundamental Review of the Trading Book,Bank for International Settlements,Basel Committee on Banking Supervision,Market risk,Parametric approach,Non-parametric approach},
  language     = {eng},
  note         = {Student Paper},
  title        = {Fundamental review of the trading book - The new approach to measure market risk},
  year         = {2017},
}