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Article
Publication date: 1 March 2000

CHRIS MARRISON, TIL SCHUERMANN and JOHN D. STROUGHAIR

Since 1996, the Bank for International Setdements (BIS) has set the capital level that banks must hold against market risks by a specific formula. This article presents a…

204

Abstract

Since 1996, the Bank for International Setdements (BIS) has set the capital level that banks must hold against market risks by a specific formula. This article presents a practical approach for incorporating the effects of asset illiquidity and management response lags in setting regulatory capital levels to account for market risk. According to the BIS guidelines, capital should be a function of the effectiveness of limit management and market liquidity, because actively managing limits and positions can significantly reduce the risk of a trading operation. Although this approach represents an improvement over previous methods of setting capital, significant limitations still remain, namely, liquidity constraints and response lags in management intervention, which increase portfolio risk. The authors suggest specific amendments to the reg‐ulatory capital guidelines that may mitigate both of these limitations

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The Journal of Risk Finance, vol. 1 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 1 January 2000

Francis X. Diebold, Til Schuermann and John D. Stroughair

Extreme value theory (EVT) holds promise for advancing the assessment and management of extreme financial risks. Recent literature suggests that the application of EVT generally…

1315

Abstract

Extreme value theory (EVT) holds promise for advancing the assessment and management of extreme financial risks. Recent literature suggests that the application of EVT generally results in more precise estimates of extreme quantiles and tail probabilities of financial asset returns. This article assesses EVT from the perspective of financial risk management. The authors believe that the recent optimism regarding EVT may be appropriate but exaggerated, and that much of its potential remains latent. They support their claim by describing various pitfalls associated with the current use of EVT techniques, and illustrate how these can be avoided. In conclusion, the article defines several specific research directions that may further the practical and effective application of EVT to risk management.

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The Journal of Risk Finance, vol. 1 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 1 April 2003

SERGIO M. FOCARDI and FRANK J. FABOZZI

Fat‐tailed distributions have been found in many financial and economic variables ranging from forecasting returns on financial assets to modeling recovery distributions in…

285

Abstract

Fat‐tailed distributions have been found in many financial and economic variables ranging from forecasting returns on financial assets to modeling recovery distributions in bankruptcies. They have also been found in numerous insurance applications such as catastrophic insurance claims and in value‐at‐risk measures employed by risk managers. Financial applications include:

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The Journal of Risk Finance, vol. 5 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 1 January 2002

MANOJ K. SINGH

This article outlines a procedure for quantifying risk‐adjusted capital reserves that may be used for both performance evaluation and capital allocation. The author identifies and…

341

Abstract

This article outlines a procedure for quantifying risk‐adjusted capital reserves that may be used for both performance evaluation and capital allocation. The author identifies and quantifies the sources of risk capital that must be addressed, to cover current investment and withstand market shocks, for any business line that exhibits earnings volatility. The author classifies risk capital into two types: market‐risk capital and earnings volatility‐related capital. Market risk capital may be divided into two categories; risks due to “normal” or “diffusion” type price movements and catastrophic moves or “stress” events. In contrast, earnings volatility‐related capital is directly related to the firm's equity‐at‐risk, in the event that market shocks lead to sustained earnings volatility. The author suggests that these risk‐adjusted capital measures may be used as a benchmark, in conjunction with net earnings, to evaluate performance, or to allocate equity capital across different operations within a firm.

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The Journal of Risk Finance, vol. 3 no. 2
Type: Research Article
ISSN: 1526-5943

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