The effect of default risk on trading book capital requirements for public equities: an irc application for the Brazilian market

• Ano de defesa: 2015
• Autor(a) principal: Rodrigues, Matheus Pimentel
• Orientador(a): Pinto, Afonso de Campos
• Tipo de documento: Dissertação
• Tipo de acesso: Acesso aberto
• Idioma: eng
• Palavras-chave em Português: KMV; Ações
• Palavras-chave em Inglês: Incremental risk charge; Value-at-risk; Equities
• Link de acesso: https://hdl.handle.net/10438/14015

This is one of the first works to address the issue of evaluating the effect of default for capital allocation in the trading book, in the case of public equities. And more specifically, in the Brazilian Market. This problem emerged because of recent crisis, which increased the need for regulators to impose more allocation in banking operations. For this reason, the BIS committee, recently introduce a new measure of risk, the Incremental Risk Charge. This measure of risk, is basically a one year value-at-risk, with a 99.9% confidence level. The IRC intends to measure the effects of credit rating migrations and default, which may occur with instruments in the trading book. In this dissertation, the IRC was adapted for the equities case, by not considering the effect of credit rating migrations. For that reason, the more adequate choice of model to evaluate credit risk was the Moody’s KMV, which is based in the Merton model. This model was used to calculate the PD for the issuers used as case tests. After, calculating the issuer’s PD, I simulated the returns with a Monte Carlo after using a PCA. This approach permitted to obtain the correlated returns for simulating the portfolio loss. In our case, since we are dealing with stocks, the LGD was held constant and its value based in the BIS documentation. The obtained results for the adapted IRC were compared with a 252-day VaR, with a 99% confidence level. This permitted to conclude the relevance of the IRC measure, which was in the same scale of a 252-day VaR. Additionally, the adapted IRC was capable to anticipate default events. All result were based in portfolios composed by Ibovespa index stocks.