Economic Capital (EC) covers potential losses under normal conditions, whereas Regulatory Capital (RC) covers potential losses under stressed conditions. Thus, is not uncommon for the RC to be grater... Read More

Here is the excel formula with steps: =NORMSDIST((NORMSINV(0.02)+NORMSINV(0.999)×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST((−2.054+3.09×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST(-1.135) =12.8% They keep changing t... Read More

I believe that Prospect Theory (as defined by Kahneman, Amos, and Tversky) implicitly makes use spectral risk measures. Though I am not able to find any literature linking the two, I think there is c... Read More

Standard (read: regulators will accept it) could be a one day, 99% VaR calculated with two years of historical data. A minimum of one year of history is needed although this is not the norm. Typicall... Read More

Great question. We would expect 3rd party risk providers to have specialized expertise (robust regression techniques, factor research, data cleansing etc.). We might grant them these advantages but s... Read More

The first issue you need to care about using intraday data to compute beta is the Epps effect (collapse of correlation when you zoom in). This effect comes from different parts, the first being that... Read More

The closest contract to this is gap risk which does trade, either as OTC swap (client looking for a hedge) or embedded inside a structured note (bank looking to recycle risk). Basic starting point i... Read More

Just adding the time/frequency dimension difference to what was said above: model backtesting is a model performance technique which takes place on an ongoing basis (in particular for VaR, breaches n... Read More

Financial markets & Corporate Strategy - Grinblatt & Titman The book is very intuitive, but as a consequence less comprehensive than ex. Options, Futures, and other Derivatives by Hull (which is seen... Read More

Below you find some observations... In CAPM, we assume people are risk-averse and people get compensated for the systematic risk they suffer. The assumption that most people are risk-averse makes se... Read More