Question

Suppose daily losses (gains) from trading are independent and normally distributed with mean zero. Calculate in terms of the standard deviation of the daily losses (gains) (a) the basic Basel I regulatory capital requirement assuming calculated as 3 times the ten-day VaR and (b) the economic capital calculated using a 99.97% confidence level and a one-year time horizon. Would you expect the economic and regulatory capital to become closer together or further apart if daily losses/gains are generated by a distribution with much heavier tails than the normal distribution? What would you expect to be the impact of the daily losses/gains exhibiting positive autocorrelation.


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  • CreatedJuly 30, 2015
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