Value At Risk And Bank Capital Management. Risk Adjusted Performances, Capital Management And Capital Allocation Decision Making

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Academic Press, 2007. — 280 p. — (Academic Press Advanced Finance). — ISBN 9780123694669 (print); ISBN 9780080471068 (eBook).A unique combination of concise, expert academic analysis of the latest technical VaR measures and their applications and the practical realities of bank decision making about capital management and capital allocation.Preface.<strong>Value at Risk, Capital Management, and Capital Allocation An Introduction to Value at Risk. Capital Management and Capital Allocation: The Structure of the Book.<strong>What Is Capital Management? Regulatory Capital and the Evolution of Basel II. The 1988 Basel I Accord and the 1996 Amendment. The Concept of Regulatory Capital. Overview of the Basel II Capital Accord. Pillar 1: Minimum Capital Requirements — The Main Changes Introduced by Basel II. Box 2-1: Impact of the Basel II Accord on the Level of Minimum Regulatory Capital Requirements. Pillar 2: Supervisory Review Process. Pillar 3: Market Discipline. The Debate about Basel II Adoption and Implementation. Bank Estimates of Required Capital and the Different Notions of Bank Capital. Book Value of Capital and the Impact of IAS/IFRS. Market Capitalization and the Double Perspective of Bank Managers. The Impact of Alternative Notions of Capital on Capital Management and Allocation. Summary. Further Readings.<strong>Market Risk The Variance–Covariance Approach. A Simplified Example. The Choice of the Relevant Random Variables. Mapping Exposures. Box 3-1: Mapping Equity Positions through Beta: An Example. VaR for a Portfolio. Box 3-2: Calculating VaR for a Three-Stock Portfolio. Box 3-3: Why Mapping Is Important. Estimating Volatility and Correlation: Simple Moving Averages. Estimating Volatility and Correlation: Exponentially Weighted. Moving Averages and GARCH Models. VaR Estimates and the Relevance of the Time Horizon. Implied Volatilities and Correlations. Box 3-4: Deriving Implied Volatility from Option Prices. Simulation Approaches: Historical and Monte Carlo Simulation. Historical Simulation. Hybrid Approach. Monte Carlo Simulations. Filtered Historical Simulations. Value at Risk for Option Positions. Problems in Option VaR Measurement. Potential Solutions for Option VaR Measurement. Extreme-Value Theory and Copulas. Extreme-Value Theory. Copulas. Expected Shortfall and the Problem of VaR Non-Subadditivity. Back-Testing Market Risk Models. Which Series Should Be Considered? Actual versus Theoretical. Portfolio Returns. Back-Testing VaR Forecasts: Unconditional Accuracy and Independence. Internal VaR Models and Market Risk Capital Requirements. Stress Testing. Summary. Further Readings.<strong>Credit Risk Defining Credit Risk: Expected and Unexpected Losses. Agency Ratings. External Rating Assignment. Transition Matrixes and Cumulative and Marginal Default Probabilities. Quantitative Techniques for Stand-Alone Credit Risk Evaluation. Moody’s/KMV EDF and External Scoring Systems. Merton’s (1974) Model and Moody’s/KMV Expected Default Frequency. Box 4-1: Deriving the Theoretical Credit Spread for Risky Bonds in the Merton (1974) Model. Credit-Scoring Systems. Capital Requirements for Credit Risk under Basel II. Standardized Approach. Foundation and Advanced Internal Rating–Based Approaches. Internal Ratings. Internal Rating Assignment Process. Rating Quantification and the Definition of Default. Point-in-Time versus Through-the-Cycle Internal Ratings. Estimating Loss Given Default. Estimating Exposure at Default. Interaction between Basel II and International Accounting Standards. Alternative Approaches