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Models for Risk Aggregation and Sensitivity Analysis: An Application to Bank Economic Capital
Company: Journal of Risk and Financial Management
Company Url: Click here to open
Year Of Publication: 2009
Month Of Publication: January
Resource Link: Click here to open
Pages: 118-189
Download Count: 0
View Count: 1234
Comment Num: 0
Language: English
Source: article
Who Can Read: Free
Date: 12-31-2013
Publisher: Administrator
Summary
First, we extend the scope of risk aggregation analysis to liquidity and interest rate risks. Second, we use bank call reports to explore the impact of business mix and inter-risk correlations on total risk. Third, we estimate and compare alternative established frameworks for risk aggregation (including copula models) on the same data-sets across banks, comparing absolute total risk measures (Value-at-Risk – VaR and proportional diversification benefits-PDB), goodness-of-fit (GOF) of the model as data as well as the variability of the VaR estimate with respect to sampling error in parameter. This benchmarking and sensitivity analysis suggests that practitioners consider implementing a simple non-parametric methodology (empirical copula simulation- ECS) in order to quantify integrated risk, in that it is found to be more conservatism and stable than the other models. We observe that ECS produces 20% to 30% higher VaR relative to the standard Gaussian copula simulation (GCS), while the variance-covariance approximation (VCA) is much lower.(volume 2, number 1)
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Author(s)
Inanoglu, Hulusi Sign in to follow this author
Jacobs, Michael Jr. Sign in to follow this author
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