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Copula: A New Vision for Economic Capital and Application to a Four Line of Business Company
Year Of Publication: 2003
Month Of Publication: April
Pages: 22
Download Count: 374
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 3-15-2007
Publisher: Administrator
Summary
In this article, we suggest the use of copula theory as a solution to this problem. A copula is afunction that embodies all the information about the dependence between the components ofa random vector. When a copula is applied to marginal distributions that are subject to someminor technical requirements, but do not necessarily belong to the same distribution family itresults in a proper multivariate distribution.We use this property to model the overall distribution of claim costs of a four-LOB company.By using different copulas we show that the dependence structure has a substantial impact onthe Economic Capital of that firm. In particular, we pay attention to situations in whichattritional losses from different LOBs compensate for each other to produce stable totalresults, while at the same time extreme losses tend to occur simultaneously across differentLOBs. This type of dependence could not be modelled by the multivariate normaldistribution, which is at the root of many current Economic Capital assessment models.
Author(s)
Fabien, Faivre Sign in to follow this author
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