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Basle Committee specification (rationale?)

Thread starter #1
What is the simple to understand explanation/rationale behind the Basle Committee specification for multiple of 3 times the 99% confidence 10-day VaR as minimum regulatory market risk capital for investement banks, etc?

I am curious about the explanation both in quantative and qualitative aspect, most importantly based on historical context, what good this parameter has done? How it will affect the investment banking Risk management parctices if parameter (3 times) gest changed?

Thank you.
 

David Harper CFA FRM

David Harper CFA FRM
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#2
Hi @premseoul I am aware of no explicit, specific justification in the Basel documents aside from the statement in bcbs119 that: Banks will be required to add to this factor a “plus” directly related to the ex-post performance of the model, thereby introducing a builtin positive incentive to maintain the predictive quality of the model."

I think the only thing I've ever read about this is somewhere in Jorion where he justifies it (but on his own, I believe) by invoking Chebyshev's inequality: https://en.wikipedia.org/wiki/Chebyshev's_inequality
i.e., if you solve for Chebyshev's (k) as a function of a 1.0% probability, then you get a (k) which is about 3.0x the σ = 2.33 quantile given by a normal 99.0% VaR. Put another way, multiplying by 3.0 scales up (or stretches) a normal deviate to a deviate that represents the upper 99.0% confident bound for any (e.g., fat-tailed) distribution. Let me know if solution isn't obvious and I will find the link here in the forum which shows it. Thanks,
 
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