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Quantitative Finance · Begrippenlijst

Wat is Economic capital?

Definition 7.5 The Desk and the Firm · Hoofdstuk 7 — Limits and Capital Allocation

A firm’s economic capital is the capital it holds, by its own measure, against unexpected losses: typically the expected shortfall or value at risk of its P&L over a year at a high confidence level, computed on its own model of its risks.

Economic capital (99% expected shortfall of annual P&L) allocated to six strategies three ways. Stand-alone allocations add up to $394 million, the Euler contributions to the firm’s $213 million; trend following’s contribution is negative because it gains in the firm’s worst years. Illustrative firm, 200 000 simulated years. Data: fm_limits.allocation.
Figure 7.3. Economic capital (99% expected shortfall of annual P&L) allocated to six strategies three ways. Stand-alone allocations add up to $394 million, the Euler contributions to the firm’s $213 million; trend following’s contribution is negative because it gains in the firm’s worst years. Illustrative firm, 200 000 simulated years. Data: fm_limits.allocation.
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