Bouyé, Eric, Durrleman, Vado, Nikeghbali, Ashkan, Riboulet, Gael and Roncalli, Thierry (2001) Copulas : an open field for risk management. Working Paper. Warwick Business School Financial Econometrics Research Centre, University of Warwick.

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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
Date:	2001
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Status:	Not Peer Reviewed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
URI:	http://wrap.warwick.ac.uk/id/eprint/1826

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