Evaluation of Optimal and Coherent Risk-Capital Structures under Adverse Market Outlooks

7 Pages Posted: 18 May 2021

See all articles by Mazin A. M. Al Janabi

Mazin A. M. Al Janabi

EGADE Business School, Tecnologico de Monterrey; EGADE Business School, Tecnologico de Monterrey; Economic Research Forum (ERF)

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Date Written: May 16, 2021

Abstract

This paper proposes a reengineered and robust approach to optimal economic capital allocation, in a Liquidity-Adjusted Value at Risk (LVaR) framework, and particularly from the perspective of trading portfolios that have both long and short trading positions and disallowing both long-only positions and borrowing constraints. This paper expands previous approaches by explicitly modeling the liquidation of trading portfolios with the aid of an appropriate scaling of the multiple assets’ LVaR matrix along with GARCH-M technique to forecast conditional volatility and expected return.

Keywords: Emerging Markets, Financial Engineering, Financial Risk Management, GARCH-M Model, GCC Financial Markets, Liquidity Risk, Optimization, Portfolio Management, Sub-prime Crisis, Value-at-Risk

JEL Classification: C10, C13, G20, and G28

Suggested Citation

Al Janabi, Mazin A. M., Evaluation of Optimal and Coherent Risk-Capital Structures under Adverse Market Outlooks (May 16, 2021). Available at SSRN: https://ssrn.com/abstract=3847076 or http://dx.doi.org/10.2139/ssrn.3847076

Mazin A. M. Al Janabi (Contact Author)

EGADE Business School, Tecnologico de Monterrey ( email )

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