Aggregation of Market Risks using Pair-Copulas

Dominique Guegan () and Fatima Jouad ()
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Dominique Guegan: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Fatima Jouad: AXA GRM - AXA Group Risk Management, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: The advent of the Internal Model Approval Process within Solvency II and the desirability of many insurance companies to gain approval has increased the importance of some topics such as risk aggregation in determining overall economic capital level. The most widely used approach for aggregating risks is the variance-covariance matrix approach. Although being a relatively well-known concept that is computationally convenient, linear correlations fail to model every particularity of the dependence pattern between risks. In this paper we apply different pair-copula models for aggregating market risks that represent usually an important part of an insurer risk profile. We then calculate the economic capital needed to withstand unexpected future losses and the associated diversification benefits. The economic capital will be determined by computing both 99.5th VaR and 99.5th ES following the requirements of Solvency II and SST.

Keywords: diversification gains; Solvency II; risk aggregation; market risks; pair-copulas; economic capital; diversification gains.; risques de marché; paires de copules; Solvabilité II; agrégation des risques; capital économique; gains de diversification. (search for similar items in EconPapers)
Date: 2012-05
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00706689v1
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Published in 2012

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00706689

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