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arXiv · 1803.07590

On the Basel Liquidity Formula for Elliptical Distributions

Janine Balter·Alexander J. McNeil
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Abstract

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.

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Janine Balter, Alexander J. McNeil. 2018-03-20. On the Basel Liquidity Formula for Elliptical Distributions. https://arxiv.org/abs/1803.07590

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