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Models of Capital Requirements in Static and Dynamic Settings

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  • Giacomo Scandolo

Abstract

The aim of this paper is twofold. First, we generalize the notion of capital requirement, originally formulated in a regulatory framework, in order to unify other apparently diverse financial concepts. Second, we stress the interpretation of a capital requirement as a measure of risk, providing a link with the theory of coherent risk measures. We define a capital requirement as the minimal initial cost of a hedging action that makes the original position acceptable. Three basic elements are involved in such a methodology: a system of prices, a class of permitted hedging actions and a criterion of acceptability. Our approach is very general, because we construct capital requirements on vector spaces. However, we will give some concrete applications related, in particular, to the availability of a financial market, to the presence of different business units in an institution or to the fact that pay-offs are spread over different dates. Copyright Banca Monte dei Paschi di Siena SpA, 2004

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Bibliographic Info

Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.

Volume (Year): 33 (2004)
Issue (Month): 3 (November)
Pages: 415-435

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Handle: RePEc:bla:ecnote:v:33:y:2004:i:3:p:415-435

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Cited by:
  1. Pablo Casta├▒eda, 2007. "Long Term Risk Assessment in a Defined Contribution Pension System," Working Papers, Superintendencia de Pensiones 20, Superintendencia de Pensiones, revised Oct 2007.
  2. M. Kaina & L. R├╝schendorf, 2009. "On convex risk measures on L p -spaces," Computational Statistics, Springer, Springer, vol. 69(3), pages 475-495, July.
  3. Walter Farkas & Pablo Koch-Medina & Cosimo Munari, 2013. "Measuring risk with multiple eligible assets," Papers 1308.3331, arXiv.org, revised Mar 2014.

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