A Study On The Choice Of Liquidity Planning In New Venture Capital

The incremental risk charge(IRC) represents an estimate of the default and migration risks of unsecuritised credit products over a one-year capital horizon at a 99.9 percent confidence level, taking in to account the liquidity horizons of individual positions or sets of positions.However, there is no specific method to calculate IRC. The Basel Committee only set some key supervisory parameters. Among these parameters, the choice of liquidity horizon is the most important factor which has already been proved that different choice will cause significant different IRC charge. For banks, they should choose the liquidity horizon for their trading positons prudently. According to the Basel Committee, they hope the choice of liquidity horizon should meet two major requirements. Firstly, a non-investment-grade position is expected to have a longer assumed liquidity horizon than an investment-grade position. Secondly, the liquidity horizon is expected to be greater for positions that are concentrated. But if these requirements can be achieved or if the liquidity horizon can distinguish the different liquidity among different positions are still dubious. And some researchers even hold the point of view that, the liquidity horizon can be set to one year in all circumstances.Our paper aims to solve the following questions. Due to the lack of models of computing IRC, we introduce a method of Credit Metrics model which has been widely accepted by the industry to the computing of IRC based on the bond positions. We take the two principles of the choice of liquidity horizon set forth by the Basel Committee into fully account. We try to find that whether the credit ratings or the concentration of position will affect the choice of liquidity horizon or not.We find that:(1) To the non-investment-grade positions, only the one year horizon will be the best choice, as under the liquidity horizon of one year we get the minimum value of IRC. This is to say, as to the banks, they have the motion to choose the longer horizon for their non-investment-grade position which perfectly fit the principles of the Basel Committee.(2) To the investment-grade positions, the choice of shorter liquidity horizon is reasonable. This can be seen in our result that we get the minimum value of IRC in some shorter horizons. However, as we diversity our portfolio, we find that the one year horizon is still the best choice like non-investment-grade positions. Such results do not accord with the principle of the Basel Committee. Moreover, these results even show that, the liquidity horizon cannot play the role of distinguishing the different liquidity among different positions.Finally, we put forth some suggestions for the choice of liquidity horizon in IRC based on our empirical results.