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Models of Capital Requirements in Static and Dynamic Settings
Author(s) -
Scandolo Giacomo
Publication year - 2004
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/j.0391-5026.2004.00139.x
Subject(s) - capital requirement , capital (architecture) , construct (python library) , position (finance) , order (exchange) , financial institution , class (philosophy) , computer science , capital adequacy ratio , economic capital , economics , institution , microeconomics , risk analysis (engineering) , finance , business , incentive , profit (economics) , archaeology , artificial intelligence , programming language , history , law , political science
The aim of this paper is twofold. First, we generalize the notion of capital requirement, originally formulated in a regulatory framework, in order to unify other apparently diverse financial concepts. Second, we stress the interpretation of a capital requirement as a measure of risk, providing a link with the theory of coherent risk measures. We define a capital requirement as the minimal initial cost of a hedging action that makes the original position acceptable. Three basic elements are involved in such a methodology: a system of prices, a class of permitted hedging actions and a criterion of acceptability. Our approach is very general, because we construct capital requirements on vector spaces. However, we will give some concrete applications related, in particular, to the availability of a financial market, to the presence of different business units in an institution or to the fact that pay‐offs are spread over different dates.