Weighted sums of subexponential random variables and asymptotic dependence between returns on reinsurance equities

Jaap Geluk and Casper de Vries

No EI 2004-47, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: Asymptotic tail probabilities for bivariate linear combinations of subexponential random variables are given. These results are applied to explain the joint movements of the stocks of reinsurers. Portfolio investment and retrocession practices in the reinsurance industry, for reasons of diversification, exposes different reinsurers to the same risks on both sides of their balance sheets. Assuming, in line with the industry practice that the risk drivers follow subexponential distributions, we derive (under mild conditions) when the reinsurer's equity returns are asymptotically dependent, exposing the industry to systemic risk.

Keywords: asymptotic dependence; regular variation; subexponentiality; systemic risk (search for similar items in EconPapers)
Date: 2004-11-05
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Related works:
Journal Article: Weighted sums of subexponential random variables and asymptotic dependence between returns on reinsurance equities (2006)
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