Economic Capital horizon for market risk

giobilkis · November 9th, 2012, 8:59 am

What is the common practice in terms of horizon when setting Economic Capital for market risk?Is it 10 business days as regulatory VaR?Thanks,G

sharper · November 9th, 2012, 11:19 am

insurers in the UK calculate 1 year VaR. Solvency 2 is also 1 year VaR.

giobilkis · November 9th, 2012, 3:55 pm

If I understand correctly this is another regulatory (Solvency II) requirement....and it tells something about risk profile of insurers in UK. I can imagine that no one can hold on daily basis 1 year capital against investment in asset class with 25% volatility.My question though referred to banking institution that is required to hold roughly 3 times of 10 day VaR at 99% level.While this is well defined number, I am not sure what actual economic capital a bank holds against market exposure.Is it 10-day VaR, say at 99.98% level? Or is it only daily VaR?G

giobilkis · November 10th, 2012, 10:37 am

Thanks, Sharper.It does work out, I had a +/- mistake in Excel.G

quartz · November 12th, 2012, 9:53 am

Trading book charges for "market" risk in Basel 2.5+ comprise, beyond the older 10 day 99% VaR x3 (or x4 depending on backtesting), an analogous stressed VaR x3/x4 and possibly a 1y 99.9% VaR (kind of, see e.g. Incremental Risk Charge) for default and rating migrations. Actually not the plain VaR is used but the max of it versus a 60 day average.

giobilkis · November 13th, 2012, 4:22 pm

Thanks,Yeah, I am aware of the last 60 days average, etc...The issue was that I got enormous EC comparing to regulatory charge on market risk.I mean that rough factor of 3*sqrt(10) in regulatory charge could not even close compensate for the 99.98% confidence level and sqrt(250) in EC calculation.