Beruflich Dokumente
Kultur Dokumente
[25 marks]
Consider the exponential dispersion family of distributions where the probability density is
(y b ())
f (y; , ) = exp
+ c (y, )
a ()
for parameters (canonical parameter) and the dispersion parameter.
(a) Outline the advantages and disadvantage of the exponential dispersion family for risk modelling and discuss its relative usefulness for
market, credit, operational and insurance risks.
[15 marks]
(b) Show that the Tail-Value-at-Risk for the exponential dispersion family of distributions is given by
E [y] +
[15 marks]
The joint probability distribution for a random vector X with dimension
d with continuous strictly increasing distribution functions is denoted by
FX (x1 , . . . , xd ) = Pr (X1 x1 , . . . , Xd xd )
with marginal distributions FX1 , . . . , FXd where FXi (x) = Pr (Xi xi ) .
The survival functions of the marginal distributions are given by F X1 , . . . , F Xn .
The survival copula is defined as C such that
x1 + 1 x2 + 2
F (x1 , x2 ) =
+
1
x1 , x2 0, , 1 , 2 > 0
1
2
for d = 2.
(a) Show that the survival function for a bivariate copula C (u, v) is
C (u, v) = 1 u v + C (u, v)
[3 marks]
2
(b) Show that the marginal survival distributions for the bivariate Pareto
distribution are given by
i
Fi (x) =
, i = 1, 2
i + x
[8 marks]
(c) Show that the survival copula for the bivariate Pareto distribution is
[4 marks]
1
C (u1 , u2 ) = u1 + u2 1
3.
[20 marks]
An extreme value copula has the scaling property
C (un1 , . . . , und ) = C n (u1 , . . . , un )
for all n > 0 (where the superscript indicates raising to the power n).
Consider the (extreme value) bivariate Gumbel copula given by
1
1 1
Gu
C,, (u1 , u2 ) = u1 u2 exp ( ln u1 ) + ( ln u2 )
When = = 1 this is the standard Gumbel copula.
(a) Show that the Gumbel copula is an Archimedean copula. Note: a
bivariate Archimedean Copula can be expressed in the form
C (u, v) = 1 ( (u) + (v)) u, v (0, 1]
where the generator is a convex decreasing function with domain
(0, 1] and range [0, ) such that (1) = 0.
[4 marks]
(b) Show that bivariate Gumbel copula has the scaling property.
[4 marks]
(c) Discuss the advantages and disadvantages of the Gumbel copula for
extreme value risk modelling in insurance, market, credit and operational risk modelling. Discuss alternative copulas that are used
in practice for models of these dierent risks and comment on their
suitability compared to the Gumbel copula.
[12 marks]
4.
[22 marks]
Assume that the daily returns on a security Ri are normally distributed
with mean i andPvariance 2i . ConsiderPa portfolio with weights wi in
n
n
asset/risk i with i=1 wi = 1 and Rp = i=1 wi Ri .The portfolio return
2
variance p , in matrix notation, is
2p = wwT
where w is a vector of portfolio weights, is the variance-covariance matrix
with ij th element ij = i,j i j , and i,j is the correlation between return
on asset i and return on asset j.
(a) Show that the Value at Risk for security i, V aRi , is approximated by
k i Vi0 where Vi0 is the current value of the holding in the security
and k is a constant dependent on the time horizon and probability
level assumed.
[3 marks]
(b) Derive an expression for the V aR of the total portfolio return, V aRp ,
in terms of the individual asset return V aRs.
[4 marks]
(c) Incremental V aR, IV aR, for a security in portfolio is defined as
IV aRi = wi
Show that
V aRp =
V aRp
wi
n
X
IV aRi
i=1
Hint: You may wish to first show that V aR is an homogeneous function of order one in the amounts in the risks so that
V aR (tw1 , tw2 , . . . , twn ) = tV aR (w1 , w2 , . . . , wn )
and then use this result.
[5 marks]
(d) Discuss the extent to which incremental V aR, IV aR, is an improvement on V aR as a risk measure for market risks and outline the
extent to which IV aR can be applied to other risks such as credit,
operational and insurance risks.
[10 marks]
5.
[18 marks]
Consider insurer loss reserve data denoted by Cij the claim amount for
accident period i and development period j where j = k i with k equal
to the payment period. Assume you have data for periods i = 1, 2, . . . , I.
Consider a GLM model for claim amounts with a gamma distribution and
E [Cij ]
= i (j + 1) e(j+1)
Ni
where Ni are the known number of claims incurred in accident period i,
and i , and are parameters to be estimated.
(a) Explain how the model captures development year trends and accident year eects and discuss how you would test the model assumptions.
[5 marks]
(b) Discuss the advantages of using GLM models for loss reserving.
[8 marks]
(c) Briefly outline how you would use a bootstrap procedure with this
model in order to estimate the Value-at-Risk for the loss reserves
for a single line of business. Briefly mention the additional issues
would need to be taken into account for the case of multiple lines of
business.
[5 marks]
END