Beyond Correlations: The Use and Abuse of Copulas in Economic Capital Calculations

Belgian Actuarial Bulletin, Vol. 7, No. 1, 2007

5 Pages Posted: 17 Mar 2009  

Andrew Chernih

affiliation not provided to SSRN

Mateusz Maj

Vrije Universiteit Brussel (VUB) - Faculty of Economic, Social and Political Sciences

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Date Written: April 2007

Abstract

Copulas have become a buzzword in recent years in the academic community, and practitioners are paying more and more attention to the choice of a copula in risk management applications.

This paper gives a non-technical and pedagogical introduction to the topic of copulas and explains their role for economic capital calculations.

Risk professionals may be tempted to dress up models by using sophisticated tools like for instance copulas. This is because these toys give them the possibility to give a scientific flavour and "serieux" to their models, and as such may serve as "an umbrella" towards the different stakeholders involved.

We provide examples to show that models that involve complicated copulas are by no means better than simple but robust and transparent models and do not always add value. However, building a simple as possible, but not too simple, model requires significant actuarial training and expertise.

Keywords: Copula, Economic Capital, Basel II, Solvency II, Correlations, Value-at-Risk

Suggested Citation

Chernih, Andrew and Maj, Mateusz and Vanduffel, Steven, Beyond Correlations: The Use and Abuse of Copulas in Economic Capital Calculations (April 2007). Belgian Actuarial Bulletin, Vol. 7, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1359578

Andrew Chernih

affiliation not provided to SSRN ( email )

No Address Available

Mateusz Maj

Vrije Universiteit Brussel (VUB) - Faculty of Economic, Social and Political Sciences ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 191
B-1050 Brussels
Belgium

Steven Vanduffel (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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