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Solvency Capital estimation and Risk Measures

Author

Listed:
  • Antoni Ferri

    (Departament d'Econometria, Estadística i Economia Espanyola. RISC-IREA. University of Barcelona. Spain)

  • Montserrat Guillén

    (Departament d'Econometria, Estadística i Economia Espanyola. RISC-IREA. University of Barcelona. Spain)

  • Lluís Bermúdez

    (Departament de Matemàtica Financera i Actuarial. RISC-IREA. University of Barcelona. Spain)

Abstract

This paper examines why a financial entity’s solvency capital estimation might be underestimated if the total amount required is obtained directly from a risk measurement. Using Monte Carlo simulation we show that, in some instances, a common risk measure such as Value-at-Risk is not subadditive when certain dependence structures are considered. Higher risk evaluations are obtained for independence between random variables than those obtained in the case of comonotonicity. The paper stresses, therefore, the relationship between dependence structures and capital estimation.

Suggested Citation

  • Antoni Ferri & Montserrat Guillén & Lluís Bermúdez, 2012. "Solvency Capital estimation and Risk Measures," Working Papers XREAP2012-02, Xarxa de Referència en Economia Aplicada (XREAP), revised Jan 2012.
    • Handle: RePEc:xrp:wpaper:xreap2012-02
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    References listed on IDEAS

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    Cited by:

    1. Lluís Bermúdez & Antoni Ferri & Montserrat Guillén, 2014. "On the use of risk measures in solvency capital estimation," International Journal of Business Continuity and Risk Management, Inderscience Enterprises Ltd, vol. 5(1), pages 4-13.

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