Fundamental Review of the Trading Book: Explainable Equity Volatility Models with Event Risk

The Fundamental Review of the Trading Book is a set of regulations set by the Basel committee, which is expected to be implemented by banks in Canada by late 2023. According to these regulations, in order to maintain stability in the banking system, banks need to post extra capital against the so-called non-modellable risk factors. As this extra capital could significantly increase the total market risk capital requirements for a bank, reducing the weight of these non-modellable risk factors can greatly increase the bank’s profitability. We will seek new ways of reducing the capital requirement of equity volatility non-modellable risk factors, via decomposing them using state-of-the-art machine learning techniques, using explainable AI techniques to provide interpretability for these machine learning models, and detecting and measuring event risk in equity volatility time series.

Faculty Supervisor:

Marcos Escobar Anel;Matthew Davison

Student:

Partner:

CIBC

Discipline:

Business

Sector:

Finance and Insurance

University:

The University of Western Ontario

Program: