Method of calculating market risk
The main method to calculate market risk is VaR, that is, under normal market conditions and given confidence interval (usually 99%), the expected maximum loss of portfolio in a given holding period. In other words, under normal market conditions and a given holding period, the VaR loss probability of this portfolio is only a given probability level (that is, confidence level).
Method of calculating risk value
It mainly includes variance-covariance method, historical simulation method and Monte Carlo simulation method.
Variance-covariance method assumes that the change of risk factor income obeys a specific distribution, usually assuming a normal distribution, and then estimates the parameter values of risk factor income distribution through historical data analysis, such as variance, mean and correlation coefficient. Then, according to the unit sensitivity and confidence level of the position when the risk factors change, the var value of each risk factor is determined. Then, according to the correlation coefficient between the risk factors, the VaR value of the whole portfolio is determined. Of course, you can also directly calculate the VaR value of the whole portfolio (the portfolio here is a unit position, that is, the position is 1) at a certain confidence level through the following formula, and the results are consistent.
The formula represents the standard deviation of the return of the whole portfolio, σi and σj represent the standard deviation of risk factors I and J, ρij represents the correlation coefficient of risk factors I and J, and xi represents the sensitivity of the whole portfolio to the change of risk factor I, sometimes called Delta. Under the assumption of normal distribution, xi is the sum of Deka of each financial instrument to risk factor I in the portfolio.
The historical simulation method assumes that history can be repeated in the future, and directly simulates the future changes of risk factor returns according to the historical data of risk factor returns. Under this method, the VaR value is directly taken from the historical distribution of portfolio income, which comes from the mark-to-market value of each financial instrument in the portfolio, and this mark-to-market value is a function of risk factor income. Specifically, the historical simulation method is divided into three steps: arranging a historical market change sequence for the risk factors in the portfolio, calculating the return change of the portfolio with each historical market change, and calculating the VaR value. Therefore, the historical data of risk factor income is the main data source of this VaR model.
Monte Carlo simulation method is to generate a market change sequence by random method, and then simulate the income distribution of portfolio risk factors through this market change sequence, and finally calculate the VaR value of portfolio. The main difference between Monte Carlo simulation method and historical simulation method is that the former uses random method to obtain market change sequence instead of copying history, that is, the first step of changing the calculation process of historical simulation method is to obtain a market change sequence by random method. The market change sequence can be simulated by historical data or hypothetical parameters. This method is not as widely used as the first two methods because of its complicated calculation process.
Bank market risk
The concept of bank market risk
Market risk is actually the risk of bank losses caused by price changes such as interest rates, exchange rates, stocks and commodities. As the name implies, market risk actually includes interest rate risk, exchange rate risk, stock market risk and commodity price risk. At present, banks in China are restricted in stock and commodity business, so their market risks are mainly manifested in interest rate risk and exchange rate risk.
Interest rate risk is the most important risk in the whole financial market. Because interest rate is the opportunity cost of capital, exchange rate, stock and commodity prices are inseparable from interest rate; At the same time, because the credit relationship is the most important relationship between banks and their customers, interest rate risk is the most important risk that banks face in their business activities. In China, because the economic transformation has not been completed, the degree of marketization still needs to be improved, the process of interest rate marketization has just started, and the interest rate risk problem has just emerged. Although the process of interest rate marketization marked by deposit and loan interest rates has been promoted, the marketization of benchmark interest rates in China has not yet started, the market factors affecting interest rates are still unclear, and there is still no effective yield curve in the market. Interest rate risk will gradually become the most important market risk in China's financial industry.
Exchange rate risk is an important part of market risk. With the sustained economic growth of China, more and more domestic enterprises will go abroad to invest overseas, and the exchange rate risk will also increase. At the same time, since the reform of RMB exchange rate formation mechanism was implemented in July 2005, the risk of RMB to foreign exchange has increased significantly. From July 2005 to mid-May 2006, the appreciation of RMB against the US dollar has exceeded the psychological price of 8 yuan. With the further improvement of the RMB exchange rate formation mechanism, the role of market factors in the exchange rate formation mechanism will be further enhanced, and the exchange rate risk of China banks will be further enhanced. It is becoming more and more important to strengthen the management and supervision of exchange rate risk.
Requirements of the Bank for International Settlements for Market Risk Supervision
1988 Basel capital accord only considers credit risk, but ignores market risk, especially fails to pay enough attention to many new and complicated OTC derivatives market risks. However, a series of major risk events in the 1990s made the Basel Committee aware of the importance of market risk, and then accelerated the pace of bringing market risk into the scope of capital supervision requirements. 1996 1 month, the Basel Committee issued the Amendment to the Capital Accord on Market Risk in time. This revision has changed the simple method in Basel Capital Accord 1988 to determine the risk weight of off-balance-sheet business by comparing on-balance-sheet assets, and put forward two methods to measure risks: standard method and internal model method.
The Basel Committee promulgated the Core Principles of Effective Banking Supervision in 1997. So far, market risk, credit risk and operational risk have become the focus of banking supervision departments. From 65438 to 0999, the Basel Committee began to revise the Basel Capital Accord from 65438 to 0988. On October 26th, 2004/kloc-0, the Basel Committee issued the framework of the new Basel Capital Accord to replace the Basel Capital Accord of 1988. The new agreement absorbs the comprehensive risk management principles including market risk in 1996 "amendment" and 1997 "core principles", and extends the definition of risk to credit risk, market risk, operational risk and other factors, basically covering the risks faced by the banking industry at this stage, so as to ensure that the bank's capital adequacy performance is sufficiently sensitive to the changes in risk degree caused by the development of banking business and changes in asset-liability structure. At this time, the market risk factors have been fully reflected in the various regulatory provisions of the New Basel Capital Accord. In June 2005, the Basel Committee revised the 1996 version of the Amendment to the Capital Accord on Market Risk again, which made the capital supervision requirements for market risk more clear and detailed.
Since the implementation of 1996 Amendment, banks in most countries and regions have paid enough attention to market risk management. After more than 10 years of development, they have established a relatively complete market risk management system.