Capital requirements, the option surface, market, credit and liquidity risk
نویسندگان
چکیده
The Sato process model for option prices is expanded to accomodate credit considerations by incorporating a single jump to default occuring at an independent random time with a Weibull distribution. Explicit formulas, in this context, for the bid and ask prices of two price economies that price residual risks to levels of risk acceptability are then derived. Liquidity considerations are thereby captured by the movements in the two prices that indirectly reect changes occuring in the underlying set of zero cost risky cash ows acceptable to the market. In such two price economies it has been proposed that capital requirements supporting a trade are to be set at the di¤erence between the ask and bid prices of the two price economy. We proceed to evaluate the variations in the level of such required capital over time. In particular we observe that the Lehman bankruptcy was primarily a liquidity event for the remaining banks from the perspective of changes in the levels of such a required capital. Additionally, we observe that variations in such capital requirements over time are primarily explained by movements in the option surface and the levels of liquidity, with credit variations playing a part occasionally. The estimations Dilip Madan acknowledges support from the Humboldt foundation as a Research Award Winner.
منابع مشابه
Estimation of capital requirements in the Iranian banking system To deal with market and credit risks
Each financial institution faces different types of risks, with three of the most important risks in the banking system being credit, market and operational risks. In order to manage risk, sufficient capital must be allocated. One of the common ways to calculate the capital needed to deal with these risks is to calculate the capital proportional to each risk and then the algebraic sum to obtain...
متن کاملEffects Of Risk Parameters (Credit, Operational, Liquidity And Market Risk) On Banking System Efficiency (Studying 15 Top Banks In Iran)
متن کامل
The Effect Of Capital Buffer On The Relationship Between Liquidity Risk And Market and Book Risk Taking Of The Banks
This research examines the effect of the Capital Buffer, on banks as a regulatory and controlling factor on the relationship between liquidity risk and banks' risk aversion. In this study, eight banks were surveyed for the period of 2011-2014. In order to measure the Capital Buffer criterion, the legal deposit rates of central bank of the Islamic Republic of Iran has been used. For measuring...
متن کاملRisk Sensitivity of Banks, Interbank Markets and the Effects of Liquidity Regulation
The industrial organization approach to banking is extended to analyze the effects of interbank market activity and regulatory liquidity requirements on bank behavior. A multi-stage decision situation allows for considering the interaction between credit risk and liquidity risk of banks. This interaction is found to make a risk neutral bank behave as if it were risk averse in an environment whe...
متن کاملEffects and Consequences of Capital Raising on Liquidity Creation and Credit Providing Banks
With the onset of the financing crisis in the real sector of the economy and the intensification of shortcomings in the banking system of Iran in recent years, the issue of capital raising has been seriously considered by economic and banking experts to improve the health and stability of banks and their credit provision. What has been critical in this regard is the effects of capital raisings ...
متن کامل