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Stress tests of capital requirements

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  • Dimson, Elroy
  • Marsh, Paul

Abstract

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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Suggested Citation

  • Dimson, Elroy & Marsh, Paul, 1997. "Stress tests of capital requirements," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1515-1546, December.
  • Handle: RePEc:eee:jbfina:v:21:y:1997:i:11-12:p:1515-1546
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    1. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
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    10. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 393-430, June.
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    12. Christopher L. Culp & Merton H. Miller, 1995. "Metallgesellschaft And The Economics Of Synthetic Storage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 62-76.
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    17. Pyle, David H., 1986. "Capital regulation and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 189-201, June.
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    Cited by:

    1. Paul Louis Ceriel Hilbers & Alfredo Mario Leone & Mahinder Singh Gill & Owen Evens, 2000. "Macroprudential Indicators of Financial System Soundness," IMF Occasional Papers 192, International Monetary Fund.
    2. John Cotter, 2004. "Minimum capital requirement calculations for UK futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(2), pages 193-220, February.
    3. John Cotter, 2004. "Realized volatility and minimum capital requirements," Money Macro and Finance (MMF) Research Group Conference 2003 20, Money Macro and Finance Research Group.
    4. Cabedo Semper, J. David & Moya Clemente, Ismael, 2003. "Value at risk calculation through ARCH factor methodology: Proposal and comparative analysis," European Journal of Operational Research, Elsevier, vol. 150(3), pages 516-528, November.
    5. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
    6. Brooks, C. & Clare, A. D. & Persand, G., 2000. "A word of caution on calculating market-based minimum capital risk requirements," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1557-1574, October.
    7. Basu, Sanjay, 2011. "Comparing simulation models for market risk stress testing," European Journal of Operational Research, Elsevier, vol. 213(1), pages 329-339, August.
    8. Longin, François, 1999. "From Value at Risk to Stress Testing: The Extreme Value Approach," CEPR Discussion Papers 2161, C.E.P.R. Discussion Papers.

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