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The Risks of Financial Institutions$
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Mark Carey and Rene M. Stulz

Print publication date: 2007

Print ISBN-13: 9780226092850

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092980.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 September 2021

Bank Trading Risk and Systemic Risk

Bank Trading Risk and Systemic Risk

(p.29) 1 Bank Trading Risk and Systemic Risk
The Risks of Financial Institutions

Philippe Jorion

University of Chicago Press

This chapter provides evidence that practitioner and regulatory use of market value at risk (VaR) measures is not likely to be destabilizing. It specifically presents a review of VaR and herding theories. VaR have become important tools of portfolio management. The VaR-induced herding effect depends on commonalities in the positions in financial institutions. Tests of herding usually focus on portfolio positions for a subgroup of investors. The chapter then addresses the description of the market risk charge. Trading is more profitable, but riskier, than banking activities. Trading by primary dealer subsidiaries has a negative correlation with banking activities. There is no evidence that the post-1998 period has witnessed an increase in volatility. Arguments that bank trading and VaR systems contribute to volatility due to similar positions has no empirical support.

Keywords:   market, value at risk, herding theories, herding effect, financial institutions, portfolio management, market risk charge, trading, bank trading

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