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VaR and Liquidity Risk
Year Of Publication: 2002
Month Of Publication: February
Pages: 44
Download Count: 158
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 5-3-2009
Publisher: Administrator
Summary
Current trends in international banking supervision following the 1996Amendment to the Basel Accord emphasise market risk control based uponinternal Value-at-risk (VaR) models. This paper discusses the merits anddrawbacks of VaR models in the light of their impact on market liquidity. After apreliminary review of basic concepts and measures regarding market risk,market friction and liquidity risk, the arguments supporting the internal modelsapproach to supervision on market risk are discussed, in the light of the debateon the limitations and possible enhancements of VaR models. In particular,adverse systemic effects of widespread risk management practices areconsidered. Risk measurement models dealing with liquidity risk are thenexamined in detail, in order to verify their potential for application in the field.We conclude that VaR models are still far from effectively treating market andliquidity risk in their multi-faceted aspects. Regulatory guidelines are right inrecognising the importance of internal risk control systems. Implementation ofthose guidelines might inadvertently encourage mechanic application of VaRmodels, with adverse systemic effects.
Author(s)
Erzegovesi, Luca Sign in to follow this author
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