Pareto Models for Risk Management

Arthur Charpentier () and Emmanuel Flachaire
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Arthur Charpentier: Université du Québec à Montréal (UQAM)

A chapter in Recent Econometric Techniques for Macroeconomic and Financial Data, 2021, pp 355-387 from Springer

Abstract: Abstract The Pareto model is very popular in risk management, since simple analytical formulas can be derived for financial downside risk measures (value-at-risk, expected shortfall) or reinsurance premiums and related quantities (large claim index, return period). Nevertheless, in practice, distributions are (strictly) Pareto only in the tails, above (possible very) large threshold. Therefore, it could be interesting to take into account second-order behavior to provide a better fit. In this article, we present how to go from a strict Pareto model to Pareto-type distributions. We discuss inference, derive formulas for various measures and indices, and finally provide applications on insurance losses and financial risks.

Keywords: EPD; Expected shortfall; Financial risks; GPD; Hill; Pareto; Quantile; Rare events; Regular variation; Reinsurance; Second order; Value-at-risk (search for similar items in EconPapers)
JEL-codes: C13 C18 C46 G22 G32 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Pareto Models for Risk Management (2021)
Working Paper: Pareto models for risk management (2019)
Working Paper: Pareto models for risk management (2019)
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DOI: 10.1007/978-3-030-54252-8_14

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