Abstract Most banks use the top-down approach to aggregate their risk types when computing total economic capital. Following this approach, marginal distributions for each risk type are first independently estimated and then merged into a joint model using a copula function. Due to lack of reliable data, banks tend to manually select the copula as well as its parameters. In this paper we assess the model risk related to the choice of a specific copula function. The aim is to compute upper and lower bounds on the total economic capital for the aggregate loss distribution of DNB, the largest Norwegian bank, and the key tool for computing these bounds is the Rearrangement Algorithm introduced in Embrechts et al. (J. Bank. Financ. 37(8):2750–2764, 2013). The application of this algorithm to a real situation poses a series of numerical challenges and raises a number of warnings which we illustrate and discuss.

Bounds on total economic capital: the DNB case study / Kjersti Aas; Giovanni Puccetti. - In: EXTREMES. - ISSN 1386-1999. - ELETTRONICO. - 17:(2014), pp. 693-715. [10.1007/s10687-014-0202-0]

Bounds on total economic capital: the DNB case study

PUCCETTI, GIOVANNI
2014

Abstract

Abstract Most banks use the top-down approach to aggregate their risk types when computing total economic capital. Following this approach, marginal distributions for each risk type are first independently estimated and then merged into a joint model using a copula function. Due to lack of reliable data, banks tend to manually select the copula as well as its parameters. In this paper we assess the model risk related to the choice of a specific copula function. The aim is to compute upper and lower bounds on the total economic capital for the aggregate loss distribution of DNB, the largest Norwegian bank, and the key tool for computing these bounds is the Rearrangement Algorithm introduced in Embrechts et al. (J. Bank. Financ. 37(8):2750–2764, 2013). The application of this algorithm to a real situation poses a series of numerical challenges and raises a number of warnings which we illustrate and discuss.
17
693
715
Kjersti Aas; Giovanni Puccetti
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2158/931368
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