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A justification of the Basel liquidity formula for risk capital in the trading book is given under the assumption that market risk-factor changes form a Gaussian white noise process over 10-day time steps and changes to P&L are linear in the risk-factor changes. A generalization of the formula is derived under the more general assumption that risk-factor changes are multivariate elliptical. It is shown that the Basel formula tends to be conservative when the elliptical distributions are from the heavier-tailed generalized hyperbolic family. As a by-product of the analysis a Fourier approach to calculating expected shortfall for general symmetric loss distributions is developed.
Expanding on techniques of concentration of measure, we develop a quantitative framework for modeling liquidity risk using convex risk measures. The fundamental objects of study are curves of the form $(rho(lambda X))_{lambda ge 0}$, where $rho$ is a
We propose a unified structural credit risk model incorporating both insolvency and illiquidity risks, in order to investigate how a firms default probability depends on the liquidity risk associated with its financing structure. We assume the firm f
We propose a Monte Carlo simulation method to generate stress tests by VaR scenarios under Solvency II for dependent risks on the basis of observed data. This is of particular interest for the construction of Internal Models and requirements on evalu
Latency (i.e., time delay) in electronic markets affects the efficacy of liquidity taking strategies. During the time liquidity takers process information and send marketable limit orders (MLOs) to the exchange, the limit order book (LOB) might under
We study the pricing and hedging of European spread options on correlated assets when, in contrast to the standard framework and consistent with imperfect liquidity markets, the trading in the stock market has a direct impact on stocks prices. We con