Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/155535
Authors: 
Uroševic, Branko
Drenovak, Mikica
Rankovic, Vladimir
Jelic, Ranko
Ivanovic, Milos
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 6293
Abstract: 
We propose a novel method of Mean-Capital Requirement portfolio optimization. The optimization is performed using a parallel framework for optimization based on the Nondominated Sorting Genetic Algorithm II. Capital requirements for market risk include an additional stress component introduced by the recent Basel 2.5 regulation. Our optimization with the Basel 2.5 formula in the objective function produces superior results to those of the old (Basel II) formula in stress scenarios in which the correlations of asset returns change considerably. These improvements are achieved at the expense of reduced cardinality of Pareto-optimal portfolios. This reduced cardinality (and thus portfolio diversification) in periods of relatively low market volatility may have unintended consequences for banks’ risk exposure.
Subjects: 
finance
market risk
Basel 2.5
GARCH
NSGA-II
JEL: 
C01
Document Type: 
Working Paper

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