Stress Tests of Capital Requirements
30 Pages Posted: 28 Jan 1997
Date Written: October 1996
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.
JEL Classification: D81, G31
Suggested Citation: Suggested Citation