Best Paper - Volume 12

The JFI editors are pleased to announce that the JFI Best Paper Prize for the most significant paper published in the 2003 Journal of Financial Intermediation has gone to Michael Gordy for the paper "A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules," published in Volume 12, Issue 3. The prize carries with it a $2,500 check for the winners.

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A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules
Michael B. Gordy
Board of Governors of the Federal Reserve System, 20th and C Streets, Washington, DC 20551

Abstract

I demonstrate that ratings-based capital rules, including both the current Basel Accord and its proposed revision, can be reconciled with the general class of credit value-at-risk models. Each exposure's contribution to VaR is portfolio-invariant only if (a) dependence across exposures is driven by a single systematic risk factor, and (b) no exposure accounts for more than an arbitrarily small share of total portfolio exposure. Analysis of rates of convergence to asymptotic VaR leads to a simple and accurate portfolio-level add-on charge for undiversified idiosyncratic risk. There is no similarly simple way to address violation of the single factor assumption. Journal of Economic Literature Classification Numbers: G31, G38. ©2003 Elsevier Inc.