Linear and non-linear replication factor models for Funds look-through

The Fundamental Review of the Trading Book (FRTB) is a set of regulations by the Basel committee, which is expected to be implemented by banks by 2022. The regulation targets market risk management in banking industry. The regulation targets market risk management in banking industry. According to FRTB, banks must decompose funds that can be looked through into their constituents and determines the relevant capital requirements as if the underlying position were held directly by the bank. Implementing a look-through approach is challenging for funds with large number of underlying constituents. In this research, we will design a procedure for constructing a replicating (proxy) portfolio comprising securities from the potential universe of portfolio securities the subject fund hold. The proxy portfolio has less number of constituents and is designed to achieve an expected shortfall tracking error of no more than a given threshold compared to the expected shortfall of the fund’s actual portfolio. Then, the proxy portfolio is used to calculate the capital requirements.
Another topic of this research is identification of event risks and its disentanglement from market-wide risk using time series analysis.

Faculty Supervisor:

Mario Ghossoub


Corina Birghila




Statistics / Actuarial sciences


Finance, insurance and business


University of Waterloo


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