The purpose of this article is to provide methods to evaluate performance and to develop capital allocation models for securities firms.
Recently the need for risk management is emerging as the volatility of market price grows higher and competition between institutions grows more intense. And the landmark Basle accord of 1988 provided the first step toward tighter risk management. This agreement led to a still-evolving framework to impose capital adequacy requirements against market risks.
The VAR and the EAR approaches can be used when we evaluate performance. But this study suggests that for performance evaluation the EAR approach is more useful. And the VAR approach can provide methods to allocate capital. The result of empirical test show that the capital allocation model is more efficient than actual allocation.
