Measuring Dynamic Market Risk Charge for Market Risks
International Journal of Economics, Finance and Management Sciences
Volume 1, Issue 3, June 2013, Pages: 175-180
Received: Jun. 17, 2013; Published: Jul. 30, 2013
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Authors
Norhana Abd. Rahim, Faculty of Science and Technology, Universiti Sains Islam Malaysia, Malaysia
Fauziah Hanim Tafri, Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA, Malaysia
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Abstract
An insurance company is significantly affected by market risks. In many current risk-based capital models, the market risk capital charge is determined by applying the fixed pre-determined percentage to the annual statement values regardless of market conditions. Many questions have been raised as to whether the fixed pre-determined percentage is the accurate measure of market risks. In response to this problem, this paper undertakes to determine a suitable percentage for the market risks faced by life insurers in Malaysia. The data involved in this paper are Kuala Lumpur Composite Index (KLCI), Malaysia Bond Index, foreign exchange rates and Housing Price Index (HPI) for year 2004 to 2009. The volatility model is used as proxy to measure the market risk charges. Then, a simulation is run to calculate the dynamic risk charges of market risks by adopting a dynamic financial analysis. Based on the analysis, the dynamic market risk charges are found to be higher for most of the assets classes during the crisis period compared to the normal period. As the ups and downs of the market conditions significantly affect the percentage of risk charge for market risks, it can be concluded that the fixed pre-determined percentage is not a practical measure.
Keywords
Risk-Based Capital, Market Risk, Pre-Determined Percentage, Percentage Return, Dynamic Risk Charge
To cite this article
Norhana Abd. Rahim, Fauziah Hanim Tafri, Measuring Dynamic Market Risk Charge for Market Risks, International Journal of Economics, Finance and Management Sciences. Vol. 1, No. 3, 2013, pp. 175-180. doi: 10.11648/j.ijefm.20130103.17
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