Asset strongAllocationstrong under the Basel Accord Risk Measures.pdfVIP

Asset Allocation under the Basel Accord Risk Measures∗ Zaiwen Wen† Xianhua Peng‡ Xin Liu§ Xiaodi Bai¶ Xiaoling Sun First version January 2013, this version August 2013 Abstract Financial institutions are currently required to meet more stringent capital require- ments than they were before the recent financial crisis; in particular, the capital require- ment for a large bank’s trading book under the Basel 2.5 Accord more than doubles that under the Basel II Accord. The significant increase in capital requirements renders it necessary for banks to take into account the constraint of capital requirement when they make asset allocation decisions. In this paper, we propose a new asset allocation model that incorporates the regulatory capital requirements under both the Basel 2.5 Accord, which is currently in effect, and the Basel III Accord, which was recently proposed and is currently under discussion. We propose an unified algorithm based on the alternating direction augmented Lagrangian method to solve the model; we also establish the first-order optimality of the limit points of the sequence generated by the algorithm under some mild conditions. The algorithm is simple and easy to imple- ment; each step of the algorithm consists of solving convex quadratic programming or ∗We are grateful to Steven Kou for his insightful comments to the paper. Zaiwen Wen was partially sup- ported by the NSFC grantand research fund (20110073120069) for the Doctoral Program of High- er Education of China. Xianhua Peng was partially supported by a grant from School-Based-Initiatives of HKUST (Grant No. SBI11SC03) and Hong Kong RGC Direct Allocation