Economic Capital

[diegol]

I'm looking for a good read on Economic Capital.

Searching this board I found this thread in which this specialty guide is mentioned. Since the thread and the guide date from 2009 and 2004, respectively, I was wondering if you could recommend a more up-to-date paper.

Another paper which looks good is Economic Capital Modeling: Practical Considerations by Milliman. This one dates from 2006.

Of course not always newer means better, but in this fast-developing area, I would think "more relevant" at the least.

Thanks in advance for your input.

[Bobby]

What area of practice? Life? P&C?

[diegol]

Originally Posted by Bobby

What area of practice? Life? P&C?

Life. Thanks.

[Paintball Wizard]

Originally Posted by diegol

Another paper which looks good is Economic Capital Modeling: Practical Considerations by Milliman. This one dates from 2006.

That looks like what was on the ILA (either DP or CSP, don't recall) syllabus at some point (or still).

[Paintball Wizard]

Have you researched Solvency II and Basel guidelines and recommendations?

[E]

Originally Posted by Paintball Wizard

Have you researched Solvency II and Basel guidelines and recommendations?

This large paper requires a lot of coffee to get through, but it's chock full of the stuff:

http://www.bis.org/publ/joint25.pdf

(I know because I outlined it for the APM course I instruct.)

[secondlife]

Its look like the book is ($63) is as dry as the study note.

What is EC? The VAR (this was a brand new term as statisticians did not know what confidence intervals were like the Sharpe Ratio/coefficient of variation) was a failure. Instead of coming up with a measure for one portfolio/division, come up with a measure for the whole company considering correlations among the divisions/portfolios. I am not sure they mentioned anything about fat tails/rare events in it. So basically EC is a wholesome approach.

Do I have it right E?

[E]

Originally Posted by secondlife

Its look like the book is ($63) is as dry as the study note.

What is EC? The VAR (this was a brand new term as statisticians did not know what confidence intervals were like the Sharpe Ratio/coefficient of variation) was a failure. Instead of coming up with a measure for one portfolio/division, come up with a measure for the whole company considering correlations among the divisions/portfolios. I am not sure they mentioned anything about fat tails/rare events in it. So basically EC is a wholesome approach.

Do I have it right E?

My sense, and this is echoed repeatedly in that Basel Committee paper I linked to, is that VaR was widely used because it's easy to calculate and explain. However, it's now generally regarded as too weak compared to alternatives. It didn't hold up well during the crisis, or more generally any time tails get very long and non-normal.

[secondlife]

Originally Posted by E

My sense, and this is echoed repeatedly in that Basel Committee paper I linked to, is that VaR was widely used because it's easy to calculate and explain. However, it's now generally regarded as too weak compared to alternatives. It didn't hold up well during the crisis, or more generally any time tails get very long and non-normal.

I am not criticizing/arguing with you, but easily explain part was the problem.That committee approved "VAR", would you expect them to say "we intentionally misrepresented facts and Taleb was right?"

[diegol]

Originally Posted by E

This large paper requires a lot of coffee to get through, but it's chock full of the stuff:

http://www.bis.org/publ/joint25.pdf

(I know because I outlined it for the APM course I instruct.)

Thanks for this!

I was looking for a more academic take on EC (ie, a paper describing concepts from scratch rather than practical applications of EC). So after a few days now after my first post, I think I'll start with the second paper I mention there.