The financial crisis at the end of last decade has called for a comprehensive liquidity risk management framework. The challenge not only lies in finding appropriate liquidity risk measures but more importantly how to apply these measures to implement a risk based liquidity management. A core...

In this paper we describe methods of decomposing risk into subcomponents such as contributing instruments, subportfolios or underlying risk factors e.g., equity, foreign exchange, economy-wide systematic and interest rate risk factors. The Euler allocation principle for allocation of instrument...

Portfolio risk measures such as Value at Risk is traditionally measured using a buy and hold assumption on the portfolio. In particular the 10-day market risk capital is commonly measured as the 1-day Value at Risk scaled by the square root of 10. While this scaling is convenient to obtain n-day...

The measurement of firms funding liquidity risk is in general complex. In particular, liquidity insolvency happens the first time the firm cannot generate sufficient counterbalancing capacity from the liquidity hedging portfolio to cover the funding gap. The complexity arises from the fact that...

Risk aggregation is the roll-up of low-level risks or sub-risks to higher levels. Risk management for banks or insurance institutions involves risk measurement and risk control at the individual risk level, including market risk, credit risk, and operational risks and also the aggregated risk of...

The management of a liquid asset portfolio that can be used to generate counterbalancing capacity in liquidity distress is quickly emerging as a core function in banks. The new Basel III liquidity risk regulation underscores the importance in banks managing a liquidity contingency buffer. The...

Credit value adjustment (CVA) is an adjustment added to the fair value of an over-the-counter trade due to the counterparty risk. When the exposure to the counterparty changes in the same direction as the counterparty default risk the so-called wrong-way-risk (WWR) must be taken into account....

The capturing of tail events, especially those that incur severe loss at rare chance, is one of the important objectives for modern risk analysis. However past behavior in financial data is not necessarily a correct reflection of the possible scenarios in the future. The economic turmoils in the...