This issue of The Journal of Risk addresses risk-constrained portfolio management, the practical implementation of the 2016 Basel capital requirements in the face of market and default risk, and the joint testing of marginal specifications for risk models.
In our first paper, “A new bootstrap test for multiple assets joint risk testing”, David Ardia, Lukasz Gatarek and Lennart F. Hoogerheide present a simulation-based technique for the joint statistical testing of marginal models that is particularly well suited to dependent time series and copula models. In particular, the authors provide an illustration on generalized autoregressive conditional heteroscedasticity (GARCH) models with a view toward value-at-risk (VaR) estimation in a variety of settings, including portfolios contrasted along size and sector dimensions.
In “Default risk charge: modeling framework for the ‘Basel’ risk measure”, the second paper in this issue, Sascha Wilkens and Mirela Predescu contribute a study that helps us better understand the challenges in implementing the proposed 2016 Basel regulations on default credit charges in trading portfolios. These new rules are a direct consequence of the undercapitalization of trading books observed during the 2008 crisis. In their paper, the authors focus on calibration issues to estimate default correlations in order to capture systemic, industry and firm-specific effects. They also highlight the computational issues that arise in default risk charge calculations.
The issue’s third paper, “A review of the fundamentals of the Fundamental Review of the Trading Book: standard foreign exchange rules are highly asymmetric with respect to reporting currencies”, sees Hany Farag highlighting further specific issues arising from the implementation of the 2016 Basel regulations with regard to market risk for trading portfolios. In particular, Farag discusses the significant effects of currency reporting, which are further exacerbated by the aggregation mechanism used for nonlinear portfolios.
In our fourth and final paper, “How risk managers should fix tracking error volatility and value-at-risk constraints in asset management”, Luca Riccetti puts the spotlight on the trade-off between risk management, as measured by tracking error volatility (TEV) relative to a benchmark, and portfolio optimization. Riccetti develops a strategy that helps to identify the most efficient portfolios subject to a TEV constraint. This study also supports the adoption of a maximum VaR constraint, instead of a maximum variance constraint, for active portfolio management.
University of Florida
In this paper, a novel simulation-based methodology is proposed to test the validity of a set of marginal time series models.
This paper presents a comprehensive model framework for DRC that is compliant with the revised Basel regulatory framework.
A review of the fundamentals of the Fundamental Review of the Trading Book: standard foreign exchange rules are highly asymmetric with respect to reporting currencies
This paper develops a framework to fully characterize the invariance of the Delta capital charge for the FX book under a change in reporting currency.
How risk managers should fix tracking error volatility and value-at-risk constraints in asset management
In this paper, the author determines an optimal value for a set of limits composed of the lower limit on TEV, the upper limit on TEV and the upper limit on VaR.