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Aggregation of Market Risks using Pair-Copulas

  • Dominique Guegan


    (Axe Finance - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)

  • Fatima Jouad


    (Axe Finance - AXA GRM - AXA Group Risk Management - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

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.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00706689.

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Date of creation: May 2012
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Handle: RePEc:hal:cesptp:halshs-00706689
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