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Stress tests of capital requirements

  • Dimson, Elroy
  • Marsh, Paul

This paper examines the performance of the leading methods for setting capital requirements for securities firms' trading books. Tests are conducted on a large sample of UK equity market makers' books over a substantial number of periods of equity market stress from 1985 to 1995. The comprehensive and building-block approaches, favoured by US and European regulators, fail to provide effective cover. Only portfolio-based, value-at-risk type models are efficient in providing appropriate levels of capital to cover the position risk of equity trading books. This paper was presented at the Financial Institutions Center's October 1996 conference on "

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 21 (1997)
Issue (Month): 11-12 (December)
Pages: 1515-1546

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Handle: RePEc:eee:jbfina:v:21:y:1997:i:11-12:p:1515-1546
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  9. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
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  12. Dale, R. & Wolfe, S., 1996. "EU Capital Requirements and the Level Playing Field," Papers 96-111, University of Southampton - Department of Accounting and Management Science.
  13. Dimson, E & Marsh, P R, 1983. " The Stability of UK Risk Measures and the Problem of Thin Trading," Journal of Finance, American Finance Association, vol. 38(3), pages 753-83, June.
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  18. Michael Phelan, 1995. "Probability and Statistics Applied to the Practice of Financial Risk Management: The Case of JP Morgan's RiskMetrics™," Center for Financial Institutions Working Papers 95-19, Wharton School Center for Financial Institutions, University of Pennsylvania.
  19. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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