XREAP2012-02: Solvency Capital estimation and Risk Measures

This paper examines why a financial entity’s solvency capital estimation might be  underestimated if the total amount required is obtained directly from a risk measurement. Using Monte Carlo simulation we show that, in some instances, a common risk measure such as Value-at-Risk is not subadditive when certain dependence structures are considered. Higher risk evaluations are obtained for independence between random variables than those obtained in the case of comonotonicity. The paper stresses, therefore, the relationship between dependence structures and capital estimation.

Ferri, A. (RFA-IREA); Guillén, M. (RFA-IREA); Bermúdez, Ll. (RFA-IREA)