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Copulas : an open field for risk management

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Bouyé, Eric, Durrleman, Vado, Nikeghbali, Ashkan, Riboulet, Gael and Roncalli, Thierry (2001) Copulas : an open field for risk management. Working Paper. University of Warwick: Warwick Business School Financial Econometrics Research Centre. Working Papers Series, Vol.2001 (No.1).

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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...

Abstract

One of the main issues of risk management is the aggregation
of individual risks. A powerful concept to
aggregate the risks — the copula function — has been
introduced in finance by Embrechts, McNeil, and
Straumann [1999,2000]. In their papers, the authors
clarify the essential concepts of dependence and correlation
and certainly will greatly influence the risk
management industry. The goal of this paper is to provide
simple applications for the practical use of copulas
for risk management from an industrial point of view.
First, we remind some basics about copulas. Then,
some applications of copulas for market risk, credit risk
and operational risk are given. We will not provide a
full mathematical treatment of the subject and we refer
interested readers to Joe [1997] or Nelsen [1999].

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HB Economic Theory
Q Science > QA Mathematics

Divisions:

Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School

Library of Congress Subject Headings (LCSH):

Copulas (Mathematical statistics), Risk management -- Mathematical models, Econometrics

Series Name:

Working Papers Series

Publisher:

Warwick Business School Financial Econometrics Research Centre

Place of Publication:

University of Warwick

Official Date:

2001

Dates:

Date	Event
2001	Published

Volume:

Vol.2001

Number:

No.1

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

References:

[1] Basel Committee on Banking Supervision, Operational
Risk — Consultative Document, Supporting
document to the New Basel Capital Accord,
January 2001
[2] Bouyé, E., V. Durrleman, A. Nikeghbali, G.
Riboulet and T. Roncalli [2000], Copulas for
finance — a reading guide and some applications,
Groupe de Recherche Opérationnelle, Crédit Lyonnais,
Working Paper
[3] Coutant, S., P. Martineu, J. Messines, G.
Riboulet and T. Roncalli [2001], Revisiting
the dependence in credit risk models, Groupe
de Recherche Opérationnelle, Crédit Lyonnais,
Working Paper
[4] Deheuvels, P. [1978], Caractérisation complète
des lois extrêmes multivariées et de la convergence
des types extrêmes, Publications de l’Institut de
Statistique de l’Université de Paris, 23, 1-36
[5] Durrleman, V., A. Nikeghbali and T. Roncalli [2000], Which copula is the right one?,
Groupe de Recherche Opérationnelle, Crédit Lyonnais,
Working Paper
[6] Embrechts, P., McNeil , A.J. and D. Straumann
[1999], Correlation: pitfalls and alternatives,
Risk magazine, 12, May, 69-71
[7] Embrechts, P., McNeil , A.J. and D. Straumann
[2000], Correlation and dependency in risk
management: properties and pitfalls, in M. Dempster
and H.K. Mo¤att (Eds.), Risk Management:
Value at Risk and Beyond, Cambridge University
Press (yet to appear)
[8] Genes t , C., K. Ghoudi and L-P Rives t [1995],
A semiparametric estimation procedure for dependence
parameters in multivariate families of distributions,
Biometrika, 82, 543-552
[9] Georges, P., A-G. Lamy, E. Nicolas, G.
Quibel and T. Roncalli [2001], Multivariate
survival modelling: a unified approach with copulas,
Groupe de Recherche Opérationnelle, Crédit
Lyonnais, Working Paper, in preparation
[10] Joe, H. [1997], Multivariate Models and Dependence
Concepts, Monographs on Statistics and
Applied Probability, 73, Chapmann & Hall, London
[11] Li, D.X. [2000], On default correlation: a copula
function approach, Journal of Fixed Income,
March, 43-54
[12] Maccarinelli, M. and V. Maggiolini [2000],
The envolving practice of credit risk management
in global financial institutions, Risk Conference,
26/27 September, Paris
[13] Nelsen, R.B. [1999], An Introduction to Copulas,
Lectures Notes in Statistics, 139, Springer Verlag,
New York
[14] Song, P. X-K. [2000], Multivariate dispersion
models generated from Gaussian copula, Scandinavian
Journal of Statistics, 27-2, 305-320