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Market risk management in a post-Basel II regulatory environment
journal contribution
posted on 2023-06-09, 02:41 authored by Mikica Drenovak, Vladimir Rankovic, Miloš Ivanovic, Uroševic Branko, Ranko JelicRanko JelicWe propose a novel method of Mean-Capital Requirement portfolio optimization. The optimization is performed using a parallel framework for optimization based on the Nondominated Sorting Genetic Algorithm II. Capital requirements for market risk include an additional stress component introduced by the recent Basel 2.5 regulation. Our optimization with the Basel 2.5 formula in the objective function produces superior results to those of the old (Basel II) formula in stress scenarios in which the correlations of asset returns change considerably. These improvements are achieved at the expense of reduced cardinality of Pareto-optimal portfolios. This reduced cardinality (and thus portfolio diversification) in periods of relatively low market volatility may have unintended consequences for banks’ risk exposure.
History
Publication status
- Published
File Version
- Accepted version
Journal
European Journal of Operational ResearchISSN
0377-2217Publisher
ElsevierExternal DOI
Issue
3Volume
257Page range
1030-1044Department affiliated with
- Business and Management Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2016-08-31First Open Access (FOA) Date
2018-08-18First Compliant Deposit (FCD) Date
2016-08-31Usage metrics
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