Aggregating Economic Capital

Belgian Actuarial Bulletin, Vol. 5, pp. 52-56, 2005

30 Pages Posted: 19 May 2009  

Jan Dhaene

Katholieke Universiteit Leuven - Faculty of Economics and Business

M. J. Goovaerts

affiliation not provided to SSRN

Mark Lundin

affiliation not provided to SSRN

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Abstract

In this paper we analyze and evaluate a standard approach financial institutions use to calculate their so-called total economic capital.

If we consider a business that faces a total random loss S over a given one-year horizon then economic capital is traditionally defined as the difference between the 99.97% percentile of S and its expectation. The standard approach essentially assumes that the different components (risks) of S are multivariate normally distributed and this highly facilitates the computation of the total aggregated economic capital.

In this paper we show that this approach also holds for a more general framework which encompasses as a special case the multivariate normal (and elliptical) setting. We question also the assumption of multivariate normality since for many risks one often assumes other than normal distributions (e.g. a lognormal distribution for insurance risk). Assuming that risks are either normal or lognormal distributed we propose, using the concept of comonotonicity, an alternative aggregation approach.

Keywords: economic capital, aggregation, Solvency II, Basel II, VaR

Suggested Citation

Dhaene, Jan and Goovaerts, M. J. and Lundin, Mark and Vanduffel, Steven, Aggregating Economic Capital. Belgian Actuarial Bulletin, Vol. 5, pp. 52-56, 2005 . Available at SSRN: https://ssrn.com/abstract=1406868

Jan Dhaene

Katholieke Universiteit Leuven - Faculty of Economics and Business ( email )

Naamsestraat 69
Leuven, 3000
Belgium

M. J. Goovaerts

affiliation not provided to SSRN

Mark Lundin

affiliation not provided to SSRN ( email )

Steven Vanduffel (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

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

Paper statistics

Downloads
216
Rank
115,016
Abstract Views
960