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...

Liquidity risk is a risk of not being able to generate enough funds to meet the payment obligation. There has been a growing amount of literature on liquidity assessment and planning following the recent financial crisis. So far, not enough attention is given to the liquidity execution. At the...

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...

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 replication of a portfolio of cashflow instruments with another set of cashflow instruments is frequently used for pricing and hedging. For example, replication of deposits with tradable bonds allows the treasurer to determine an approximate fair value of deposits and implement hedging...

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 recent incremental risk to the Basel market risk requires banks to estimate, separately, the default and migration risk of their trading portfolios that are exposed to credit risk. The regulation requires the total regulatory charges for trading books to be computed as the sum of the market...

Lately liquidity risk has received attention from regulators and banks - having witnessed how a credit crisis evolved into a major liquidity funding problem for many banks. Following the crisis regulators has put forward a new regulation, headed under Basel III, for liquidity risk focusing on...