53 Pages Posted: 22 May 2013 Last revised: 8 Oct 2014
Date Written: October 1, 2014
We show how to reverse-engineer banks' risk disclosures, such as Value-at-Risk, to obtain an implied measure of their exposures to equity, interest rate, foreign exchange, and commodity risks. Factor Implied Risk Exposures (FIRE) are obtained by breaking down a change in risk disclosure into a market volatility component and a bank-specific risk exposure component. In a study of large US and international banks, we show that (1) changes in risk exposures are negatively correlated with market volatility and (2) changes in risk exposures are positively correlated across banks, which is consistent with banks exhibiting commonality in trading.
Keywords: Herding, Risk Disclosure, (Stressed) Value-at-Risk, Regulatory Capital
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation
Benoit, Sylvain and Hurlin, Christophe and Perignon, Christophe, Implied Risk Exposures (October 1, 2014). HEC Paris Research Paper No. FIN-2013-1012. Available at SSRN: https://ssrn.com/abstract=2267791 or http://dx.doi.org/10.2139/ssrn.2267791
By James Chen