Stress Tests of Capital Requirements
London Business School; University of Cambridge - Judge Business School
London Business School - Institute of Finance and Accounting
This paper examines the performance of the leading methods for setting capital requirements for securities firms' trading books. Tests are conducted on a large sample of UK equity market makers' books over a substantial number of periods of equity market stress from 1985 to 1995. The comprehensive and building-block approaches, favored by US and European regulators, fail to provide effective cover. Only portfolio-based, value-at-risk type models are efficient in providing appropriate levels of capital to cover the position risk of equity trading books.
Number of Pages in PDF File: 30
JEL Classification: D81, G31working papers series
Date posted: January 28, 1997
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