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.

  • CreatedJuly 30, 2015
  • Files Included
Post your question