Behavioural Risk

From Open Risk Manual

Definition

Behavioural Risk in the context Market Risk prudential regulation for financial firms is the risk of a change in exercise/prepayment outcomes such as those that arise in fixed rate mortgage products where retail clients may make decisions motivated by factors other than pure financial gain (such as demographical features and/or and other social factors. A callable bond may only be seen as possibly having behavioural risk if the right to call lies with a retail client [1]

Behavioural Risk is as defined above is essentially Prepayment Risk, restricted in the context of holding instruments with such embedded options in the Trading Book.

References

  1. Minimum capital requirements for market risk, BCBS D352

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