Chapter

Bank Trading Risk and Systemic Risk

Philippe Jorion

in The Risks of Financial Institutions

Published by University of Chicago Press

Published in print February 2007 | ISBN: 9780226092850
Published online February 2013 | e-ISBN: 9780226092980 | DOI: http://dx.doi.org/10.7208/chicago/9780226092980.003.0002
Bank Trading Risk and Systemic Risk

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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

Chapter.  10360 words.  Illustrated.

Subjects: Financial Markets

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