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Book part
Publication date: 29 December 2016

Alberto Burchi and Duccio Martelli

The recent 2008–2009 financial crisis has led international financial authorities to review the existing regulation; the Basel Committee on Banking Supervision has been…

Abstract

The recent 2008–2009 financial crisis has led international financial authorities to review the existing regulation; the Basel Committee on Banking Supervision has been thus induced to review the pillars of the Basel Accord (Basel II) in order to strengthen the risk coverage of capital framework (Basel 2.5 and III). These reforms will help to raise capital requirements for the trading book, which represents a major source of losses for internationally financial institutions, especially during crisis periods. In particular, the Committee has introduced a Stressed Value-at-Risk (SVaR) capital requirement, as a new methodology to evaluate market risk.

This chapter aims to shed some lights on the issues major banks have to face when calculating SVaR in the context of emerging markets, pointing out the differences in adopting an estimation model with respect to another one. Our results show a considerable increase in capital requirements especially when new rules are applied to financial markets with high-risk parameters, such as emerging markets are. The increased cost due to higher capital requirements could be a disincentive to investment in markets with higher risk profiles than the developed markets, taking also into account that diversification benefits deriving from investing in emerging economies have shown a decrease over time. The reduction of institutional investors can thus represent a brake on the process of innovation and evolution of emerging markets.

Details

Risk Management in Emerging Markets
Type: Book
ISBN: 978-1-78635-451-8

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Article
Publication date: 5 April 2011

Simone Varotto

The purpose of this paper is to investigate the relationship between liquidity and credit risk, and employ the findings to estimate the Incremental Risk Charge (IRC), the…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between liquidity and credit risk, and employ the findings to estimate the Incremental Risk Charge (IRC), the new credit risk capital add‐on introduced by the Basel Committee for banks' trading books. The IRC estimates are compared with stressed market risk measures, derived from a sample of corporate bond indices encompassing the recent financial crisis. This can determine the extent to which trading book capital would change in stress conditions, under newly proposed rules.

Design/methodology/approach

The Basel II and the proposed Basel III capital requirements for banks' trading books, with a sample of bond portfolios, are implemented.

Findings

The findings show that, although the (incremental) credit risk in the trading book may be considerable, the capital needed to absorb market risk‐related losses in stressed scenarios can be more than ten times larger.

Originality/value

The data, methodology and purpose are all original.

Details

International Journal of Managerial Finance, vol. 7 no. 2
Type: Research Article
ISSN: 1743-9132

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Book part
Publication date: 28 October 2019

Angelo Corelli

Abstract

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Understanding Financial Risk Management, Second Edition
Type: Book
ISBN: 978-1-78973-794-3

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Article
Publication date: 30 May 2019

Barbara Dömötör and Kata Váradi

The purpose of this paper is to investigate the possibility of monitoring stress on stock markets from the perspective of a central counterparty (CCP). Due to their…

Abstract

Purpose

The purpose of this paper is to investigate the possibility of monitoring stress on stock markets from the perspective of a central counterparty (CCP). Due to their balanced positions, CCPs are exposed to extreme price movements in both directions; thus, the major risk for them derives from extreme returns and market illiquidity. The authors examined the connection of the stress alarms of return- and liquidity-based measures to find an objective basis for stress measurement.

Design/methodology/approach

The authors defined two types of stress measures: indicators based on extreme returns and liquidity. It is suggested that the stress indicators should be based on the existing risk management methodology that examines different risk measure oversteps. The stress signals of the past nine years on the German stock market were analyzed. The authors investigated the connection between the chosen stress measures to obtain a robust measure for alarming stress.

Findings

Although extreme returns and illiquidity are both characteristics of stress, the correlation of returns- and liquidity-based stress indicators is low when taking daily values. On the other hand, the moving averages of the indicators correlate significantly in the case of measures of downward and upward extreme returns and liquidity measured by the relative spread. The results are robust enough to be used for monitoring stress periods.

Originality/value

This paper contributes to understanding the characteristics of stress periods and points to the fact that stress signals measured by different aspects can also differ within the same asset class. The moving averages of returns- and relative spread-based indicators, however, could provide a cost-effective quantitative support for the risk management of a CCP and make the margin calculation predictable for clearing members as well.

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Studies in Economics and Finance, vol. 36 no. 1
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 7 January 2019

Umut Uyar and Ibrahim Korkmaz Kahraman

This study aims to compare investors of major conventional currencies and Bitcoin (BTC) investors by using the value at risk (VaR) method common risk measure.

Abstract

Purpose

This study aims to compare investors of major conventional currencies and Bitcoin (BTC) investors by using the value at risk (VaR) method common risk measure.

Design/methodology/approach

The paper used a risk analysis named as VaR. The analysis has various computations that Historical Simulation and Monte Carlo Simulation methods were used for this paper.

Findings

Findings of the analysis are assessed in two different aspects of singular currency risk and portfolios built. First, BTC is found to be significantly risky with respect to the major currencies; and it is six times riskier than the singular most risky currency. Second, in terms of inclusion of BTC into a portfolio, which equally weights all currencies, it elevates overall portfolio risk by 98 per cent.

Practical implications

In spite of the remarkable risk level, it could be considered that investors are desirous of making an investment on BTC could mitigate their overall exposed risk relatively by building a portfolio.

Originality/value

The paper questions the risk level of Bitcoin, which is a digital currency. BTC, a matter of debate in the contemporary period, is seen as a digital currency free from control or supervision of a regulatory board. With the comparison of major currencies and BTC shows that how could be risky of a financial instrument without regulations. However, there is some advice for investors who would like to invest digital currencies despite the risk level in this study.

Details

Journal of Money Laundering Control, vol. 22 no. 1
Type: Research Article
ISSN: 1368-5201

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Article
Publication date: 13 July 2015

Mika Veli-Pekka Viljanen

– The purpose of this paper is to aid understanding of the changes in Basel Committee on Banking Supervision (BCBS) regulatory strategies after the global financial crisis.

Abstract

Purpose

The purpose of this paper is to aid understanding of the changes in Basel Committee on Banking Supervision (BCBS) regulatory strategies after the global financial crisis.

Design/methodology/approach

The author uses the credit valuation adjustment (CVA) charge reform as a test case for inquiring whether BCBS has departed from its pre-crisis facilitative regulatory strategy path. The regulatory strategy of the CVA charge is discussed.

Findings

The charge exhibits a new regulatory strategy that BCBS has adopted. It seeks to manipulate market structures by imposing risk-insensitive capital charge methodologies.

Originality/value

The paper offers a new heuristic to analyse regulatory initiatives and their significance. The CVA charge has not been subject to a regulatory theory-based analysis in prior literature.

Details

Journal of Financial Regulation and Compliance, vol. 23 no. 3
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 23 May 2008

Mazin A.M. Al Janabi

The purpose of this paper is to provide proactive risk management techniques and strategies that can be applied to trading and investment portfolios in emerging and…

Abstract

Purpose

The purpose of this paper is to provide proactive risk management techniques and strategies that can be applied to trading and investment portfolios in emerging and Islamic illiquid financial markets, such as the Moroccan foreign exchange and stock markets.

Design/methodology/approach

This paper demonstrates a practical approach for the measurements, management and control of market risk exposure for financial portfolios that contain illiquid foreign exchange and equity securities. This approach is based on the renowned concept of value‐at‐risk (VAR) along with the innovation of a software tool utilizing matrix‐algebra technique.

Findings

In order to illustrate the proper use of VAR and stress‐testing methods, real‐world examples and feasible reports of risk management are presented for the Moroccan financial markets. To this end, several case studies were achieved with the objective of creating a realistic framework of trading risk measurement and control reports in addition to the inception of procedures for the calculation of VAR limits.

Practical implications

The versatile risk management procedures that are discussed in this work will be of value to financial entities, regulators and policymakers operating within the context of emerging and Islamic markets. The risk management procedures that are outlined in this paper will aid in setting‐up of realistic policies for the management of trading/investment risk exposures in illiquid markets. The document includes comprehensive theory, analyses sections, conclusions and recommendations, and full viable risk management reports.

Originality/value

Even though considerable literatures have investigated the statistical and economic significance of VAR models, this article provides real‐world techniques and optimum asset allocation strategies that are useful for trading/investment portfolios in emerging and Islamic financial markets. This is with the objective of setting‐up the basis of a proactive methodology/procedure for the measurement, management and control of equity and foreign exchange exposures in the day‐to‐day trading/investment operations.

Details

Humanomics, vol. 24 no. 2
Type: Research Article
ISSN: 0828-8666

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Book part
Publication date: 4 December 2018

Indranarain Ramlall

Abstract

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Tools and Techniques for Financial Stability Analysis
Type: Book
ISBN: 978-1-78756-846-4

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Article
Publication date: 1 January 2006

Mazin A.M. Al Janabi

This paper seeks to provide foreign exchange risk measurement/management techniques and strategies that can be applied to investment and trading portfolios in emerging…

Abstract

Purpose

This paper seeks to provide foreign exchange risk measurement/management techniques and strategies that can be applied to investment and trading portfolios in emerging financial markets, such as the Moroccan foreign exchange market, with the objective of setting up the basis of a methodology/procedure for the measurement, management and control of foreign exchange exposures in the day‐to‐day trading operations.

Design/methodology/approach

Demonstrates a proactive approach for the measurements, management and control of market risk exposure for financial trading portfolios that contain foreign exchange securities. This approach is based on the renowned concept of value‐at‐risk (VAR) along with the creation of a software tool utilizing matrix‐algebra technique. In order to illustrate the proper use of VAR and stress‐testing methods, real‐world examples and practical reports of foreign exchange trading risk management are presented for the Moroccan Dirham.

Findings

To this end, several case studies were achieved with the objective of setting up a practical framework of trading risk measurement and control reports in addition to the inception of procedures for the calculation of VAR's limits. Moreover, the effects of hedging of foreign exchange trading exposures with reciprocal equity trading positions were explored and quantified. Finally, initial empirical tests of the long‐term behavior of the Moroccan foreign exchange and debt markets were quantified and analyzed.

Practical implications

In this work, key foreign exchange trading risk management methods, rules and procedures that financial entities, regulators and policymakers should consider in setting up their daily foreign exchange trading risk management objectives are examined and adapted to the specific needs of emerging markets, such as in the context of the Moroccan foreign exchange market.

Originality/value

This paper fills a gap in the foreign exchange risk management literature especially in the emerging markets perspective. The risk management procedures that are discussed in this work will aid financial markets' participants, regulators and policymakers in founding sound and up‐to‐date policies to handle foreign exchange risk exposures.

Details

Journal of Financial Regulation and Compliance, vol. 14 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 29 May 2007

Mazin A.M. Al Janabi

It is the purpose of this article to empirically test the risk parameters for larger foreign‐exchange portfolios and to suggest real‐world policies and procedures for the…

Abstract

Purpose

It is the purpose of this article to empirically test the risk parameters for larger foreign‐exchange portfolios and to suggest real‐world policies and procedures for the management of market risk with the aid of value at risk (VaR) methodology. The aim of this article is to fill a void in the foreign‐exchange risk management literature and particularly for large portfolios that consist of long and short positions of multi‐currencies of numerous developed and emerging economies.

Design/methodology/approach

In this article, a constructive approach for the management of risk exposure of foreign‐exchange securities is demonstrated, which takes into account proper adjustments for the illiquidity of both long and short trading/investment positions. The approach is based on the renowned concept of VaR along with the innovation of a software tool utilizing matrix‐algebra and other optimization techniques. Real‐world examples and reports of foreign‐exchange risk management are presented for a sample of 40 distinctive countries.

Findings

A number of realistic case studies are achieved with the objective of setting‐up a practical framework for market risk measurement, management and control reports, in addition to the inception of a practical procedure for the calculation of optimum VaR limits structure. The attainment of the risk management techniques is assessed for both long and short proprietary trading and/or active investment positions.

Practical implications

The main contribution of this article is the introduction of a practical risk approach to managing foreign‐exchange exposure in large proprietary trading and active investment portfolios. Key foreign‐exchange risk management methods, rules and procedures that financial entities, regulators and policymakers should consider in setting‐up their foreign‐exchange risk management objectives are examined and adapted to the specific needs of a model of 40 distinctive economies.

Originality/value

Although a substantial literature has examined the statistical and economic meaning of VaR models, this article provides real‐world techniques and optimum asset allocation strategies for large foreign‐exchange portfolios in emerging and developed financial markets. This is with the objective of setting‐up the basis of a methodology/procedure for the measurement, management and control of foreign‐exchange exposures in the day‐to‐day trading and/or asset management operations.

Details

The Journal of Risk Finance, vol. 8 no. 3
Type: Research Article
ISSN: 1526-5943

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