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ntruwant
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Posts: 121
Joined: August 3rd, 2004, 9:50 am

setting risk limits

March 9th, 2009, 1:31 pm

suppose that I calculate an economic capital on company level at 99.5%.Now I want to create a risk monitoring, with risk indicators by risk type (eg equity risk, intrest rate risk), and I want to put limits on the risk indicators.e.g maximum duration gap, maximum equity Var, ...Is there a way to set these indicator limits such that these limits are in line with 99.5% at company level? if not: what is the 'best practise' to tackle this problem?
 
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ntruwant
Topic Author
Posts: 121
Joined: August 3rd, 2004, 9:50 am

setting risk limits

March 17th, 2009, 8:44 am

anybody an idea?
 
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Fullmonte
Posts: 11
Joined: March 5th, 2009, 12:22 pm

setting risk limits

March 19th, 2009, 2:32 pm

Mind breadking this down a bit. What type of Company Portfolio are we talking about?
 
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quantmeh
Posts: 5974
Joined: April 6th, 2007, 1:39 pm

setting risk limits

March 19th, 2009, 3:06 pm

QuoteOriginally posted by: ntruwantIs there a way to set these indicator limits such that these limits are in line with 99.5% at company level? if not: what is the 'best practise' to tackle this problem?i think that limits are not directly related to your VaR or other measures. They're on their own. limits are actually a form of protection against the model risk, in that sense they shouldn't be connected to your EC. when you compute EC on company level, there's so many assumptions about correlations between different risks. you can play these correlations. therefore, you install the hard limits in order to protect yourself from errors in assumptions
 
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Fullmonte
Posts: 11
Joined: March 5th, 2009, 12:22 pm

setting risk limits

March 19th, 2009, 4:22 pm

QuoteOriginally posted by: jawabeanQuoteOriginally posted by: ntruwantIs there a way to set these indicator limits such that these limits are in line with 99.5% at company level? if not: what is the 'best practise' to tackle this problem?i think that limits are not directly related to your VaR or other measures. They're on their own. limits are actually a form of protection against the model risk, in that sense they shouldn't be connected to your EC. when you compute EC on company level, there's so many assumptions about correlations between different risks. you can play these correlations. therefore, you install the hard limits in order to protect yourself from errors in assumptionsThere does seem to be a confusion here between VaR, Credit Limits and model limits from what I can see in the original post
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