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Arthur CHARPENTIER - Extremes and correlation in risk management
Explain and demonstrate the importanceof the tails of the distributions,
tail correlations andlow frequency/high severity events
Arthur Charpentier
Universite de Rennes 1 & Ecole Polytechnique
http ://blogperso.univ-rennes1.fr/arthur.charpentier/
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Arthur CHARPENTIER - Extremes and correlation in risk management
SCR and Solvency
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Arthur CHARPENTIER - Extremes and correlation in risk management
SCR and Solvency
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Arthur CHARPENTIER - Extremes and correlation in risk management
SCR and Solvency
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Arthur CHARPENTIER - Extremes and correlation in risk management
SCR and Solvency
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Arthur CHARPENTIER - Extremes and correlation in risk management
On risk dependence in QIS’s
http ://www.ceiops.eu/media/files/consultations/QIS/QIS3/QIS3TechnicalSpecificationsPart1.PDF
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Arthur CHARPENTIER - Extremes and correlation in risk management
On risk dependence in QIS’s
http ://www.ceiops.eu/media/files/consultations/QIS/QIS3/QIS3TechnicalSpecificationsPart1.PDF
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Arthur CHARPENTIER - Extremes and correlation in risk management
On risk dependence in QIS’s
http ://www.ceiops.eu/media/files/consultations/QIS/QIS3/QIS3TechnicalSpecificationsPart1.PDF
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Arthur CHARPENTIER - Extremes and correlation in risk management
On risk dependence in QIS’s
http ://www.ceiops.eu/media/files/consultations/QIS/QIS3/QIS3TechnicalSpecificationsPart1.PDF
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Arthur CHARPENTIER - Extremes and correlation in risk management
On risk dependence in QIS’s
http ://www.ceiops.eu/media/files/consultations/QIS/QIS3/QIS3TechnicalSpecificationsPart1.PDF
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Arthur CHARPENTIER - Extremes and correlation in risk management
How to capture dependence in risk models ?
Is correlation relevant to capture dependence information ?
Consider (see McNeil, Embrechts & Straumann (2003)) 2 log-normal risks,
• X ∼ LN(0, 1), i.e. X = exp(X?) where X? ∼ N (0, 1)• Y ∼ LN(0, σ2), i.e. Y = exp(Y ?) where Y ? ∼ N (0, σ2)
Recall that corr(X?, Y ?) takes any value in [−1,+1].
Since corr(X,Y ) 6=corr(X?, Y ?), what can be corr(X,Y ) ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
How to capture dependence in risk models ?
0 1 2 3 4 5
−0
.50
.00
.51
.0
Standard deviation, sigma
Co
rre
latio
n
Fig. 1 – Range for the correlation, cor(X,Y ), X ∼ LN(0, 1) ,Y ∼ LN(0, σ2).
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Arthur CHARPENTIER - Extremes and correlation in risk management
How to capture dependence in risk models ?
0 1 2 3 4 5
−0
.50
.00
.51
.0
Standard deviation, sigma
Co
rre
latio
n
Fig. 2 – cor(X,Y ), X ∼ LN(0, 1) ,Y ∼ LN(0, σ2), Gaussian copula, r = 0.5.
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Arthur CHARPENTIER - Extremes and correlation in risk management
What about official actuarial documents ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
What about official actuarial documents ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
What about official actuarial documents ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
What about regulatory technical documents ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
What about regulatory technical documents ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
What about regulatory technical documents ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
What about regulatory technical documents ?
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Arthur CHARPENTIER - Extremes and correlation in risk management
Motivations : dependence and copulas
Definition 1. A copula C is a joint distribution function on [0, 1]d, withuniform margins on [0, 1].
Theorem 2. (Sklar) Let C be a copula, and F1, . . . , Fd be d marginaldistributions, then F (x) = C(F1(x1), . . . , Fd(xd)) is a distribution function, withF ∈ F(F1, . . . , Fd).
Conversely, if F ∈ F(F1, . . . , Fd), there exists C such thatF (x) = C(F1(x1), . . . , Fd(xd)). Further, if the Fi’s are continuous, then C isunique, and given by
C(u) = F (F−11 (u1), . . . , F−1
d (ud)) for all ui ∈ [0, 1]
We will then define the copula of F , or the copula of X.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Copula density Level curves of the copula
Fig. 3 – Graphical representation of a copula, C(u, v) = P(U ≤ u, V ≤ v).
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Arthur CHARPENTIER - Extremes and correlation in risk management
Copula density Level curves of the copula
Fig. 4 – Density of a copula, c(u, v) =∂2C(u, v)∂u∂v
.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Some very classical copulas
• The independent copula C(u, v) = uv = C⊥(u, v).
The copula is standardly denoted Π, P or C⊥, and an independent version of(X,Y ) will be denoted (X⊥, Y ⊥). It is a random vector such that X⊥ L= X and
Y ⊥L= Y , with copula C⊥.
In higher dimension, C⊥(u1, . . . , ud) = u1 × . . .× ud is the independent copula.
• The comonotonic copula C(u, v) = min{u, v} = C+(u, v).
The copula is standardly denoted M , or C+, and an comonotone version of(X,Y ) will be denoted (X+, Y +). It is a random vector such that X+ L= X and
Y + L= Y , with copula C+.
(X,Y ) has copula C+ if and only if there exists a strictly increasing function h
such that Y = h(X), or equivalently (X,Y ) L= (F−1X (U), F−1
Y (U)) where U isU([0, 1]).
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Arthur CHARPENTIER - Extremes and correlation in risk management
Some very classical copulas
In higher dimension, C+(u1, . . . , ud) = min{u1, . . . , ud} is the comonotoniccopula.
• The contercomotonic copula C(u, v) = max{u+ v − 1, 0} = C−(u, v).
The copula is standardly denoted W , or C−, and an contercomontone version of(X,Y ) will be denoted (X−, Y −). It is a random vector such that X− L= X and
Y −L= Y , with copula C−.
(X,Y ) has copula C− if and only if there exists a strictly decreasing function h
such that Y = h(X), or equivalently (X,Y ) L= (F−1X (1− U), F−1
Y (U)).
In higher dimension, C−(u1, . . . , ud) = max{u1 + . . .+ ud − (d− 1), 0} is not acopula.
But note that for any copula C,
C−(u1, . . . , ud) ≤ C(u1, . . . , ud) ≤ C+(u1, . . . , ud)
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Arthur CHARPENTIER - Extremes and correlation in risk management
0.2
0.40.6
0.8
u_10.2
0.4
0.6
0.8
u_2
00.
20.
40.
60.
81
Frec
het lo
wer b
ound
0.2
0.4
0.6
0.8
u_10.2
0.4
0.6
0.8
u_2
00.
20.
40.
60.
81
Inde
pend
ence
copu
la
0.2
0.40.6
0.8
u_10.2
0.4
0.6
0.8
u_2
00.
20.
40.
60.
81
Frec
het u
pper
bou
nd
Fréchet Lower Bound
0.0 0.2 0.4 0.6 0.8 1.0
0.00.2
0.40.6
0.81.0
Independent copula
0.0 0.2 0.4 0.6 0.8 1.0
0.00.2
0.40.6
0.81.0
Fréchet Upper Bound
0.0 0.2 0.4 0.6 0.8 1.0
0.00.2
0.40.6
0.81.0
0.0 0.2 0.4 0.6 0.8 1.0
0.00.2
0.40.6
0.81.0
Scatterplot, Lower Fréchet!Hoeffding bound
0.0 0.2 0.4 0.6 0.8 1.0
0.00.2
0.40.6
0.81.0
Scatterplot, Indepedent copula random generation
0.0 0.2 0.4 0.6 0.8 1.0
0.00.2
0.40.6
0.81.0
Scatterplot, Upper Fréchet!Hoeffding bound
Fig. 5 – Contercomontonce, independent, and comonotone copulas.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Elliptical (Gaussian and t) copulas
The idea is to extend the multivariate probit model, X = (X1, . . . , Xd) withmarginal B(pi) distributions, modeled as Yi = 1(X?
i ≤ ui), where X? ∼ N (I,Σ).
• The Gaussian copula, with parameter α ∈ (−1, 1),
C(u, v) =1
2π√
1− α2
∫ Φ−1(u)
−∞
∫ Φ−1(v)
−∞exp
{−(x2 − 2αxy + y2)
2(1− α2)
}dxdy.
Analogously the t-copula is the distribution of (T (X), T (Y )) where T is the t-cdf,and where (X,Y ) has a joint t-distribution.
• The Student t-copula with parameter α ∈ (−1, 1) and ν ≥ 2,
C(u, v) =1
2π√
1− α2
∫ t−1ν (u)
−∞
∫ t−1ν (v)
−∞
(1 +
x2 − 2αxy + y2
2(1− α2)
)−((ν+2)/2)
dxdy.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Archimedean copulas
• Archimedian copulas C(u, v) = φ−1(φ(u) + φ(v)), where φ is decreasing convex(0, 1), with φ(0) =∞ and φ(1) = 0.
Example 3. If φ(t) = [− log t]α, then C is Gumbel’s copula, and ifφ(t) = t−α − 1, C is Clayton’s. Note that C⊥ is obtained when φ(t) = − log t.
The frailty approach : assume that X and Y are conditionally independent, giventhe value of an heterogeneous component Θ. Assume further that
P(X ≤ x|Θ = θ) = (GX(x))θ and P(Y ≤ y|Θ = θ) = (GY (y))θ
for some baseline distribution functions GX and GY . Then
F (x, y) = ψ(ψ−1(FX(x)) + ψ−1(FY (y))),
where ψ denotes the Laplace transform of Θ, i.e. ψ(t) = E(e−tΘ).
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Arthur CHARPENTIER - Extremes and correlation in risk management
0 20 40 60 80 100
020
4060
80100
Conditional independence, continuous risk factor
!3 !2 !1 0 1 2 3
!3
!2
!1
01
23
Conditional independence, continuous risk factor
Fig. 6 – Continuous classes of risks, (Xi, Yi) and (Φ−1(FX(Xi)),Φ−1(FY (Yi))).
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Arthur CHARPENTIER - Extremes and correlation in risk management
Some more examples of Archimedean copulas
ψ(t) range θ
(1) 1θ
(t−θ − 1) [−1, 0) ∪ (0,∞) Clayton, Clayton (1978)
(2) (1 − t)θ [1,∞)
(3) log 1−θ(1−t)t
[−1, 1) Ali-Mikhail-Haq
(4) (− log t)θ [1,∞) Gumbel, Gumbel (1960), Hougaard (1986)
(5) − log e−θt−1e−θ−1
(−∞, 0) ∪ (0,∞) Frank, Frank (1979), Nelsen (1987)
(6) − log{1 − (1 − t)θ} [1,∞) Joe, Frank (1981), Joe (1993)
(7) − log{θt + (1 − θ)} (0, 1]
(8) 1−t1+(θ−1)t [1,∞)
(9) log(1 − θ log t) (0, 1] Barnett (1980), Gumbel (1960)
(10) log(2t−θ − 1) (0, 1]
(11) log(2 − tθ) (0, 1/2]
(12) ( 1t− 1)θ [1,∞)
(13) (1 − log t)θ − 1 (0,∞)
(14) (t−1/θ − 1)θ [1,∞)
(15) (1 − t1/θ)θ [1,∞) Genest & Ghoudi (1994)
(16) ( θt
+ 1)(1 − t) [0,∞)
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Arthur CHARPENTIER - Extremes and correlation in risk management
Extreme value copulas
• Extreme value copulas
C(u, v) = exp[(log u+ log v)A
(log u
log u+ log v
)],
where A is a dependence function, convex on [0, 1] with A(0) = A(1) = 1, et
max{1− ω, ω} ≤ A (ω) ≤ 1 for all ω ∈ [0, 1] .
An alternative definition is the following : C is an extreme value copula if for allz > 0,
C(u1, . . . , ud) = C(u1/z1 , . . . , u
1/zd )z.
Those copula are then called max-stable : define the maximum componentwise ofa sample X1, . . . , Xn, i.e. Mi = max{Xi,1, . . . , Xi,n}.
Remark more difficult to characterize when d ≥ 3.
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Gaussian, Student t (and elliptical) copulas
Focuses on pairwise dependence through the correlation matrix,X1
X2
X3
X4
∼ N0,
1 r12 r13 r14
r12 1 r23 r24
r13 r23 1 r34
r14 r24 r34 1
Dependence in [0, 1]d ←→ summarized in d(d+ 1)/2 parameters,
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Archimedean copulas
Initially, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]. But appears less flexible because of exchangeability features.
It is possible to introduce hierarchical Archimedean copulas (see Savu & Trede(2006) or McNeil (2007)). Let U = (U1, U2, U3, U4),
C(u1, u2, u3, u4) = φ−11 [φ1(u1) + φ1(u2) + φ1(u3) + φ1(u4)],
which, if φi is parametrized with parameter αi, can be summarized through
A =
1 α2 α4 α4
α2 1 α4 α4
α4 α4 1 α3
alpha4 α4 α3 1
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Archimedean copulas
Initially, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]. But appears less flexible because of exchangeability features.
It is possible to introduce hierarchical Archimedean copulas (see Savu & Trede(2006) or McNeil (2007)). Let U = (U1, U2, U3, U4),
C(u1, u2, u3, u4) = φ−14 (φ4
[φ−1
2 (φ2(u1) + φ2(u2))]
+ φ4
[φ−1
3 (φ3(u3) + φ3(u4))]),
which, if φi is parametrized with parameter αi, can be summarized through
A =
1 α2 α4 α4
α2 1 α4 α4
α4 α4 1 α3
alpha4 α4 α3 1
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Archimedean copulas
Initially, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]. But appears less flexible because of exchangeability features.
It is possible to introduce hierarchical Archimedean copulas (see Savu & Trede(2006) or McNeil (2007)). Let U = (U1, U2, U3, U4),
C(u1, u2, u3, u4) = φ−14 (φ4
[φ−1
2 (φ2(u1) + φ2(u2))]
+ φ4
[φ−1
3 (φ3(u3) + φ3(u4))]),
which, if φi is parametrized with parameter αi, can be summarized through
A =
1 α2 α4 α4
α2 1 α4 α4
α4 α4 1 α3
alpha4 α4 α3 1
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Archimedean copulas
Initially, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]. But appears less flexible because of exchangeability features.
It is possible to introduce hierarchical Archimedean copulas (see Savu & Trede(2006) or McNeil (2007)). Let U = (U1, U2, U3, U4),
C(u1, u2, u3, u4) = φ−14 (φ4
[φ−1
2 (φ2(u1) + φ2(u2))]
+ φ4
[φ−1
3 (φ3(u3) + φ3(u4))]),
which, if φi is parametrized with parameter αi, can be summarized through
A =
1 α2 α4 α4
α2 1 α4 α4
α4 α4 1 α3
α4 α4 α3 1
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Archimedean copulas
Initially, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]. But appears less flexible because of exchangeability features.
It is possible to introduce hierarchical Archimedean copulas (see Savu & Trede(2006) or McNeil (2007)). Let U = (U1, U2, U3, U4),
C(u1, u2, u3, u4) = φ−14 (φ4[φ−1
3 (φ3
[φ−1
2 (φ2(u1) + φ2(u2))]
+ φ3(u3))] + φ4(u4)),
which, if φi is parametrized with parameter αi, can be summarized through
A =
1 α2 α3 α4
α2 1 α3 α4
α3 α3 1 α4
α4 α4 α4 1
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Archimedean copulas
Initially, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]. But appears less flexible because of exchangeability features.
It is possible to introduce hierarchical Archimedean copulas (see Savu & Trede(2006) or McNeil (2007)). Let U = (U1, U2, U3, U4),
C(u1, u2, u3, u4) = φ−14 (φ4[φ−1
3 (φ3
[φ−1
2 (φ2(u1) + φ2(u2))]
+ φ3(u3))] + φ4(u4)),
which, if φi is parametrized with parameter αi, can be summarized through
A =
1 α2 α3 α4
α2 1 α3 α4
α3 α3 1 α4
α4 α4 α4 1
38
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Archimedean copulas
Initially, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]. But appears less flexible because of exchangeability features.
It is possible to introduce hierarchical Archimedean copulas (see Savu & Trede
(2006) or McNeil (2007)). Let U = (U1, U2, U3, U4),
C(u1, u2, u3, u4) = φ−14 (φ4[φ−1
3 (φ3
[φ−1
2 (φ2(u1) + φ2(u2))]
+ φ3(u3))] + φ4(u4)),
which, if φi is parametrized with parameter αi, can be summarized through
A =
1 α2 α3 α4
α2 1 α3 α4
α3 α3 1 α4
α4 α4 α4 1
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Arthur CHARPENTIER - Extremes and correlation in risk management
On copula parametrization
• Extreme value copulas
Here, dependence in [0, 1]d ←→ summarized in one functional parameters on[0, 1]d−1.
Further, focuses only on first order tail dependence.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Natural properties for dependence measures
Definition 4. κ is measure of concordance if and only if κ satisfies
• κ is defined for every pair (X,Y ) of continuous random variables,
• −1 ≤ κ (X,Y ) ≤ +1, κ (X,X) = +1 and κ (X,−X) = −1,
• κ (X,Y ) = κ (Y,X),
• if X and Y are independent, then κ (X,Y ) = 0,
• κ (−X,Y ) = κ (X,−Y ) = −κ (X,Y ),
• if (X1, Y1) �PQD (X2, Y2), then κ (X1, Y1) ≤ κ (X2, Y2),
• if (X1, Y1) , (X2, Y2) , ... is a sequence of continuous random vectors thatconverge to a pair (X,Y ) then κ (Xn, Yn)→ κ (X,Y ) as n→∞.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Natural properties for dependence measures
If κ is measure of concordance, then, if f and g are both strictly increasing, thenκ(f(X), g(Y )) = κ(X,Y ). Further, κ(X,Y ) = 1 if Y = f(X) with f almost surelystrictly increasing, and analogously κ(X,Y ) = −1 if Y = f(X) with f almostsurely strictly decreasing (see Scarsini (1984)).
Rank correlations can be considered, i.e. Spearman’s ρ defined as
ρ(X,Y ) = corr(FX(X), FY (Y )) = 12∫ 1
0
∫ 1
0
C(u, v)dudv − 3
and Kendall’s τ defined as
τ(X,Y ) = 4∫ 1
0
∫ 1
0
C(u, v)dC(u, v)− 1.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Historical version of those coefficients
Similarly Kendall’s tau was not defined using copulae, but as the probability ofconcordance, minus the probability of discordance, i.e.
τ(X,Y ) = 3[P((X1 −X2)(Y1 − Y2) > 0)− P((X1 −X2)(Y1 − Y2) < 0)],
where (X1, Y1) and (X2, Y2) denote two independent versions of (X,Y ) (seeNelsen (1999)).
Equivalently, τ(X,Y ) = 1− 4Qn(n2 − 1)
where Q is the number of inversions
between the rankings of X and Y (number of discordance).
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Arthur CHARPENTIER - Extremes and correlation in risk management
!2.0 !1.5 !1.0 !0.5 0.0 0.5 1.0
!0.5
0.0
0.5
1.0
1.5
Concordant pairs
X
Y
!2.0 !1.5 !1.0 !0.5 0.0 0.5 1.0
!0.5
0.0
0.5
1.0
1.5
Discordant pairs
XY
Fig. 7 – Concordance versus discordance.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Alternative expressions of those coefficients
Note that those coefficients can also be expressed as follows
ρ(X,Y ) =
∫[0,1]×[0,1]
C(u, v)− C⊥(u, v)dudv∫[0,1]×[0,1]
C+(u, v)− C⊥(u, v)dudv
(the normalized average distance between C and C⊥), for instance.
The case of the Gaussian random vector
If (X,Y ) is a Gaussian random vector with correlation r, then (Kruskal (1958))
ρ(X,Y ) =6π
arcsin(r
2
)and τ(X,Y ) =
2π
arcsin (r) .
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Arthur CHARPENTIER - Extremes and correlation in risk management
From Kendall’tau to copula parameters
Kendall’s τ 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Gaussian θ 0.00 0.16 0.31 0.45 0.59 0.71 0.81 0.89 0.95 0.99 1.00
Gumbel θ 1.00 1.11 1.25 1.43 1.67 2.00 2.50 3.33 5.00 10.0 +∞
Plackett θ 1.00 1.57 2.48 4.00 6.60 11.4 21.1 44.1 115 530 +∞
Clayton θ 0.00 0.22 0.50 0.86 1.33 2.00 3.00 4.67 8.00 18.0 +∞
Frank θ 0.00 0.91 1.86 2.92 4.16 5.74 7.93 11.4 18.2 20.9 +∞Joe θ 1.00 1.19 1.44 1.77 2.21 2.86 3.83 4.56 8.77 14.4 +∞
Galambos θ 0.00 0.34 0.51 0.70 0.95 1.28 1.79 2.62 4.29 9.30 +∞
Morgenstein θ 0.00 0.45 0.90 - - - - - - - -
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Arthur CHARPENTIER - Extremes and correlation in risk management
From Spearman’s rho to copula parameters
Spearman’s ρ 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Gaussian θ 0.00 0.10 0.21 0.31 0.42 0.52 0.62 0.72 0.81 0.91 1.00
Gumbel θ 1.00 1.07 1.16 1.26 1.38 1.54 1.75 2.07 2.58 3.73 +∞
A.M.H. θ 1.00 1.11 1.25 1.43 1.67 2.00 2.50 3.33 5.00 10.0 +∞
Plackett θ 1.00 1.35 1.84 2.52 3.54 5.12 7.76 12.7 24.2 66.1 +∞
Clayton θ 0.00 0.14 0.31 0.51 0.76 1.06 1.51 2.14 3.19 5.56 +∞
Frank θ 0.00 0.60 1.22 1.88 2.61 3.45 4.47 5.82 7.90 12.2 +∞
Joe θ 1.00 1.12 1.27 1.46 1.69 1.99 2.39 3.00 4.03 6.37 +∞
Galambos θ 0.00 0.28 0.40 0.51 0.65 0.81 1.03 1.34 1.86 3.01 +∞
Morgenstein θ 0.00 0.30 0.60 0.90 - - - - - - -
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Arthur CHARPENTIER - Extremes and correlation in risk management
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
Marges uniformes
Cop
ule
de G
umbe
l
!2 0 2 4!
20
24
Marges gaussiennes
Fig. 8 – Simulations of Gumbel’s copula θ = 1.2.
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Arthur CHARPENTIER - Extremes and correlation in risk management
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
Marges uniformes
Cop
ule
Gau
ssie
nne
!2 0 2 4!
20
24
Marges gaussiennes
Fig. 9 – Simulations of the Gaussian copula (θ = 0.95).
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Arthur CHARPENTIER - Extremes and correlation in risk management
Tail correlation and Solvency II
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Arthur CHARPENTIER - Extremes and correlation in risk management
Tail correlation and Solvency II
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Arthur CHARPENTIER - Extremes and correlation in risk management
Strong tail dependence
Joe (1993) defined, in the bivariate case a tail dependence measure.
Definition 5. Let (X,Y ) denote a random pair, the upper and lower taildependence parameters are defined, if the limit exist, as
λL = limu→0
P(X ≤ F−1
X (u) |Y ≤ F−1Y (u)
),
= limu→0
P (U ≤ u|V ≤ u) = limu→0
C(u, u)u
,
and
λU = limu→1
P(X > F−1
X (u) |Y > F−1Y (u)
)= lim
u→0P (U > 1− u|V ≤ 1− u) = lim
u→0
C?(u, u)u
.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Gaussian copula
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
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0.0 0.2 0.4 0.6 0.8 1.0
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1.0
L and R concentration functions
L function (lower tails) R function (upper tails)
GAUSSIAN
●
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Fig. 10 – L and R cumulative curves.
53
![Page 54: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/54.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Gumbel copula
0.0 0.2 0.4 0.6 0.8 1.0
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0.0 0.2 0.4 0.6 0.8 1.0
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L and R concentration functions
L function (lower tails) R function (upper tails)
GUMBEL
●
●
Fig. 11 – L and R cumulative curves.
54
![Page 55: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/55.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Clayton copula
0.0 0.2 0.4 0.6 0.8 1.0
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0.0 0.2 0.4 0.6 0.8 1.0
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1.0
L and R concentration functions
L function (lower tails) R function (upper tails)
CLAYTON
●
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Fig. 12 – L and R cumulative curves.
55
![Page 56: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/56.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Student t copula
0.0 0.2 0.4 0.6 0.8 1.0
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0.0 0.2 0.4 0.6 0.8 1.0
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L and R concentration functions
L function (lower tails) R function (upper tails)
STUDENT (df=5)
●
●
Fig. 13 – L and R cumulative curves.
56
![Page 57: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/57.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Student t copula
0.0 0.2 0.4 0.6 0.8 1.0
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0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
L and R concentration functions
L function (lower tails) R function (upper tails)
STUDENT (df=3)
●
●
Fig. 14 – L and R cumulative curves.
57
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Arthur CHARPENTIER - Extremes and correlation in risk management
Estimation of tail dependence
58
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Arthur CHARPENTIER - Extremes and correlation in risk management
Estimating (strong) tail dependence
From
P ≈P(X > F−1
X (u) , Y > F−1Y (u)
)P(Y > F−1
Y (u)) for u closed to 1,
as for Hill’s estimator, a natural estimator for λ is obtained with u = 1− k/n,
λ(k)U =
1n
∑ni=1 1(Xi > Xn−k:n, Yi > Yn−k:n)
1n
∑ni=1 1(Yi > Yn−k:n)
,
hence
λ(k)U =
1k
n∑i=1
1(Xi > Xn−k:n, Yi > Yn−k:n).
λ(k)L =
1k
n∑i=1
1(Xi ≤ Xk:n, Yi ≤ Yk:n).
59
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Arthur CHARPENTIER - Extremes and correlation in risk management
Asymptotic convergence, how fast ?
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
(Upper) tail dependence, Gaussian copula, n=200
Exceedance probability
0.001 0.005 0.050 0.500
0.0
0.2
0.4
0.6
0.8
1.0
Log scale, (lower) tail dependence
Exceedance probability (log scale)
Fig. 15 – Convergence of L and R functions, Gaussian copula, n = 200.
60
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Arthur CHARPENTIER - Extremes and correlation in risk management
Asymptotic convergence, how fast ?
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
(Upper) tail dependence, Gaussian copula, n=200
Exceedance probability
0.001 0.005 0.050 0.500
0.0
0.2
0.4
0.6
0.8
1.0
Log scale, (lower) tail dependence
Exceedance probability (log scale)
Fig. 16 – Convergence of L and R functions, Gaussian copula, n = 2, 000.
61
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Arthur CHARPENTIER - Extremes and correlation in risk management
Asymptotic convergence, how fast ?
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
(Upper) tail dependence, Gaussian copula, n=200
Exceedance probability
0.001 0.005 0.050 0.500
0.0
0.2
0.4
0.6
0.8
1.0
Log scale, (lower) tail dependence
Exceedance probability (log scale)
Fig. 17 – Convergence of L and R functions, Gaussian copula, n = 20, 000.
62
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Arthur CHARPENTIER - Extremes and correlation in risk management
Weak tail dependence
If X and Y are independent (in tails), for u large enough
P(X > F−1X (u), Y > F−1
Y (u)) = P(X > F−1X (u)) · P(Y > F−1
Y (u)) = (1− u)2,
or equivalently, log P(X > F−1X (u), Y > F−1
Y (u)) = 2 · log(1− u). Further, if Xand Y are comonotonic (in tails), for u large enough
P(X > F−1X (u), Y > F−1
Y (u)) = P(X > F−1X (u)) = (1− u)1,
or equivalently, log P(X > F−1X (u), Y > F−1
Y (u)) = 1 · log(1− u).
=⇒ limit of the ratiolog(1− u)
log P(Z1 > F−11 (u), Z2 > F−1
2 (u)).
63
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Arthur CHARPENTIER - Extremes and correlation in risk management
Weak tail dependence
Coles, Heffernan & Tawn (1999) defined
Definition 6. Let (X,Y ) denote a random pair, the upper and lower taildependence parameters are defined, if the limit exist, as
ηL = limu→0
log(u)log P(Z1 ≤ F−1
1 (u), Z2 ≤ F−12 (u))
= limu→0
log(u)logC(u, u)
,
and
ηU = limu→1
log(1− u)log P(Z1 > F−1
1 (u), Z2 > F−12 (u))
= limu→0
log(u)logC?(u, u)
.
64
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Arthur CHARPENTIER - Extremes and correlation in risk management
Gaussian copula
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
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0.0 0.2 0.4 0.6 0.8 1.0
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Chi dependence functions
lower tails upper tails
GAUSSIAN
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Fig. 18 – χ functions.
65
![Page 66: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/66.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Gumbel copula
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0.0 0.2 0.4 0.6 0.8 1.0
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Chi dependence functions
lower tails upper tails
GUMBEL
●
●
Fig. 19 – χ functions.
66
![Page 67: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/67.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Clayton copula
0.0 0.2 0.4 0.6 0.8 1.0
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0.0 0.2 0.4 0.6 0.8 1.0
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Chi dependence functions
lower tails upper tails
CLAYTON
●
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Fig. 20 – χ functions.
67
![Page 68: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/68.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Student t copula
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0.0 0.2 0.4 0.6 0.8 1.0
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Chi dependence functions
lower tails upper tails
STUDENT (df=3)
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Fig. 21 – χ functions.
68
![Page 69: Slides erm-cea-ia](https://reader033.fdocuments.in/reader033/viewer/2022052905/5585369bd8b42a30308b52fa/html5/thumbnails/69.jpg)
Arthur CHARPENTIER - Extremes and correlation in risk management
Application in risk management : Loss-ALAE
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0.0 0.2 0.4 0.6 0.8 1.0
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Loss
Allo
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d E
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Fig. 22 – Losses and allocated expenses.
69
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Arthur CHARPENTIER - Extremes and correlation in risk management
Application in risk management : Loss-ALAE
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
L and R concentration functions
L function (lower tails) R function (upper tails)
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Gumbel copula
●
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0.0 0.2 0.4 0.6 0.8 1.00
.00
.20
.40
.60
.81
.0
Chi dependence functions
lower tails upper tails
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Gumbel copula
●
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Fig. 23 – L and R cumulative curves, and χ functions.
70
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Arthur CHARPENTIER - Extremes and correlation in risk management
Application in risk management : car-household
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0.0 0.2 0.4 0.6 0.8 1.0
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Car claims
Ho
use
ho
ld c
laim
s
Fig. 24 – Motor and Household claims.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Application in risk management : car-household
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
L and R concentration functions
L function (lower tails) R function (upper tails)
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Gumbel copula
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●
0.0 0.2 0.4 0.6 0.8 1.00
.00
.20
.40
.60
.81
.0
Chi dependence functions
lower tails upper tails
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Gumbel copula
●
●
Fig. 25 – L and R cumulative curves, and χ functions.
72
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Arthur CHARPENTIER - Extremes and correlation in risk management
Case of Archimedean copulas
For an exhaustive study of tail behavior for Archimedean copulas, seeCharpentier & Segers (2008).
• upper tail : function of φ′(1) and θ1 = − lims→0
sφ′(1− s)φ(1− s)
,
◦ φ′(1) < 0 : tail independence
◦ φ′(1) = 0 and θ1 = 1 : dependence in independence
◦ φ′(1) = 0 and θ1 > 1 : tail dependence
• lower tail : function of φ(0) and θ0 = − lims→0
sφ′(s)φ(s)
,
◦ φ(0) <∞ : tail independence
◦ φ(0) =∞ and θ0 = 0 : dependence in independence
◦ φ(0) =∞ and θ0 > 0 : tail dependence
0.0 0.2 0.4 0.6 0.8 1.005
1015
20
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Arthur CHARPENTIER - Extremes and correlation in risk management
Measuring risks ?
the pure premium as a technical benchmark
Pascal, Fermat, Condorcet, Huygens, d’Alembert in the XVIIIth centuryproposed to evaluate the “produit scalaire des probabilites et des gains”,
< p,x >=n∑i=1
pixi =n∑i=1
P(X = xi) · xi = EP(X),
based on the “regle des parties”.
For Quetelet, the expected value was, in the context of insurance, the price thatguarantees a financial equilibrium.
From this idea, we consider in insurance the pure premium as EP(X). As inCournot (1843), “l’esperance mathematique est donc le juste prix des chances”(or the “fair price” mentioned in Feller (1953)).
Problem : Saint Peterburg’s paradox, i.e. infinite mean risks (cf. naturalcatastrophes)
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Arthur CHARPENTIER - Extremes and correlation in risk management
the pure premium as a technical benchmark
For a positive random variable X, recall that EP(X) =∫ ∞
0
P(X > x)dx.
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0.2
0.4
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0.8
1.0
Expected value
Loss value, X
Pro
babi
lity
leve
l, P
Fig. 26 – Expected value EP(X) =∫xdFX(x) =
∫P(X > x)dx.
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Arthur CHARPENTIER - Extremes and correlation in risk management
from pure premium to expected utility principle
Ru(X) =∫u(x)dP =
∫P(u(X) > x))dx
where u : [0,∞)→ [0,∞) is a utility function.
Example with an exponential utility, u(x) = [1− e−αx]/α,
Ru(X) =1α
log(EP(eαX)
),
i.e. the entropic risk measure.
See Cramer (1728), Bernoulli (1738), von Neumann & Morgenstern
(1944), Rochet (1994)... etc.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Distortion of values versus distortion of probabilities
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0 2 4 6 8 10
0.0
0.2
0.4
0.6
0.8
1.0
Expected utility (power utility function)
Loss value, X
Pro
babi
lity
leve
l, P
Fig. 27 – Expected utility∫u(x)dFX(x).
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Arthur CHARPENTIER - Extremes and correlation in risk management
Distortion of values versus distortion of probabilities
●
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0 2 4 6 8 10
0.0
0.2
0.4
0.6
0.8
1.0
Expected utility (power utility function)
Loss value, X
Pro
babi
lity
leve
l, P
Fig. 28 – Expected utility∫u(x)dFX(x).
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Arthur CHARPENTIER - Extremes and correlation in risk management
from pure premium to distorted premiums (Wang)
Rg(X) =∫xdg ◦ P =
∫g(P(X > x))dx
where g : [0, 1]→ [0, 1] is a distorted function.
Example• if g(x) = I(X ≥ 1− α) Rg(X) = V aR(X,α),• if g(x) = min{x/(1− α), 1} Rg(X) = TV aR(X,α) (also called expected
shortfall), Rg(X) = EP(X|X > V aR(X,α)).See D’Alembert (1754), Schmeidler (1986, 1989), Yaari (1987), Denneberg
(1994)... etc.
Remark : Rg(X) might be denoted Eg◦P. But it is not an expected value sinceQ = g ◦ P is not a probability measure.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Distortion of values versus distortion of probabilities
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0 2 4 6 8 10
0.0
0.2
0.4
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1.0
Distorted premium beta distortion function)
Loss value, X
Pro
babi
lity
leve
l, P
Fig. 29 – Distorted probabilities∫g(P(X > x))dx.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Distortion of values versus distortion of probabilities
●
●
●
●
●
●
●
●
●
●
●
0 2 4 6 8 10
0.0
0.2
0.4
0.6
0.8
1.0
Distorted premium beta distortion function)
Loss value, X
Pro
babi
lity
leve
l, P
Fig. 30 – Distorted probabilities∫g(P(X > x))dx.
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Arthur CHARPENTIER - Extremes and correlation in risk management
some particular cases a classical premiums
The exponential premium or entropy measure : obtained when the agentas an exponential utility function, i.e.
π such that U(ω − π) = EP(U(ω − S)), U(x) = − exp(−αx),
i.e. π =1α
log EP(eαX).
Esscher’s transform (see Esscher ( 1936), Buhlmann ( 1980)),
π = EQ(X) =EP(X · eαX)
EP(eαX),
for some α > 0, i.e.dQdP
=eαX
EP(eαX).
Wang’s premium (see Wang ( 2000)), extending the Sharp ratio concept
E(X) =∫ ∞
0
F (x)dx and π =∫ ∞
0
Φ(Φ−1(F (x)) + λ)dx
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Arthur CHARPENTIER - Extremes and correlation in risk management
Risk measures
The two most commonly used risk measures for a random variable X (assumingthat a loss is positive) are, q ∈ (0, 1),
• Value-at-Risk (VaR),
V aRq(X) = inf{x ∈ R,P(X > x) ≤ α},
• Expected Shortfall (ES), Tail Conditional Expectation (TCE) or TailValue-at-Risk (TVaR)
TV aRq(X) = E (X|X > V aRq(X)) ,
Artzner, Delbaen, Eber & Heath (1999) : a good risk measure issubadditive,
TVaR is subadditive, VaR is not subadditive (in general).
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Risk measures : a pratitionner (mis)understanding
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Risk measures : a pratitionner (mis)understanding
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Risk measures : a pratitionner (mis)understanding
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Risk measures : a pratitionner (mis)understanding
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Risk measures : a pratitionner (mis)understanding
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Arthur CHARPENTIER - Extremes and correlation in risk management
Risk measures and diversification
Any copula C is bounded by Frchet-Hoeffding bounds,
max
{d∑i=1
ui − (d− 1), 0
}≤ C(u1, . . . , ud) ≤ min{u1, . . . , ud},
and thus, any distribution F on F(F1, . . . , Fd) is bounded
max
{d∑i=1
Fi(xi)− (d− 1), 0
}≤ F (x1, . . . , xd) ≤ min{F1(x1), . . . , Ff (xd)}.
Does this means the comonotonicity is always the worst-case scenario ?
Given a random pair (X,Y ), let (X−, Y −) and (X+, Y +) denotecontercomonotonic and comonotonic versions of (X,Y ), do we have
R(φ(X−, Y −))?≤ R(φ(X ,Y ))
?≤ R(φ(X+, Y +)).
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Arthur CHARPENTIER - Extremes and correlation in risk management
Tchen’s theorem and bounding some pure premiums
If φ : R2 → R is supermodular, i.e.
φ(x2, y2)− φ(x1, y2)− φ(x2, y1) + φ(x1, y1) ≥ 0,
for any x1 ≤ x2 and y1 ≤ y2, then if (X,Y ) ∈ F(FX , FY ),
E(φ(X−, Y −)
)≤ E (φ(X,Y )) ≤ E
(φ(X+, Y +)
),
as proved in Tchen (1981).
Example 7. the stop loss premium for the sum of two risks E((X + Y − d)+) issupermodular.
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Arthur CHARPENTIER - Extremes and correlation in risk management
Example 8. For the n-year joint-life annuity,
axy:nq =n∑k=1
vkP(Tx > k and Ty > k) =n∑k=1
vkkpxy.
Thena−xy:nq ≤ axy:nq ≤ a+
xy:nq,
where
a−xy:nq =n∑k=1
vk max{kpx + kpy − 1, 0}( lower Frchet bound ),
a+xy:nq =
n∑k=1
vk min{kpx, kpy}( upper Frchet bound ).
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Arthur CHARPENTIER - Extremes and correlation in risk management
Makarov’s theorem and bounding Value-at-Risk
In the case where R denotes the Value-at-Risk (i.e. quantile function of the P&Ldistribution),
R− ≤ R(X− + Y −)6≤R(X + Y ) 6≤R(X+ + Y +) ≤ R+,
where e.g. R+ can exceed the comonotonic case. Recall that
R(X + Y ) = VaRq[X + Y ] = F−1X+Y (q) = inf{x ∈ R|FX+Y (x) ≥ q}.
Proposition 9. Let (X,Y ) ∈ F(FX , FY ) then for all s ∈ R,
τC−(FX , FY )(s) ≤ P(X + Y ≤ s) ≤ ρC−(FX , FY )(s),
whereτC(FX , FY )(s) = sup
x,y∈R{C(FX(x), FY (y)), x+ y = s}
and, if C(u, v) = u+ v − C(u, v),
ρC(FX , FY )(s) = infx,y∈R
{C(FX(x), FY (y)), x+ y = s}.
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Arthur CHARPENTIER - Extremes and correlation in risk management
0.0 0.2 0.4 0.6 0.8 1.0
!4!2
02
4
Bornes de la VaR d’un portefeuille
Somme de 2 risques Gaussiens
Fig. 31 – Value-at-Risk for 2 Gaussian risks N (0, 1).
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Arthur CHARPENTIER - Extremes and correlation in risk management
0.90 0.92 0.94 0.96 0.98 1.00
01
23
45
6
Bornes de la VaR d’un portefeuille
Somme de 2 risques Gaussiens
Fig. 32 – Value-at-Risk for 2 Gaussian risks N (0, 1).
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0.0 0.2 0.4 0.6 0.8 1.0
05
1015
20
Bornes de la VaR d’un portefeuille
Somme de 2 risques Gamma
Fig. 33 – Value-at-Risk for 2 Gamma risks G(3, 1).
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0.90 0.92 0.94 0.96 0.98 1.00
05
1015
20
Bornes de la VaR d’un portefeuille
Somme de 2 risques Gamma
Fig. 34 – Value-at-Risk for 2 Gamma risks G(3, 1).
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Arthur CHARPENTIER - Extremes and correlation in risk management
The more correlated, the more risky ?
Will the risk of the portfolio increase with correlation ?
Recall the following theoretical result :
Proposition 10. Assume that X and X ′ are in the same Frechet space (i.e.
XiL= X ′i), and define
S = X1 + · · ·+Xn and S′ = X ′1 + · · ·+X ′n.
If X �X ′ for the concordance order, then S �TV aR S′ for the stop-loss orTVaR order.
A consequence is that if X and X ′ are exchangeable,
corr(Xi, Xj) ≤ corr(X ′i, X ′j) =⇒ TV aR(S, p) ≤ TV aR(S′, p), for all p ∈ (0, 1).
See Muller & Stoyen (2002) for some possible extensions.
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Arthur CHARPENTIER - Extremes and correlation in risk management
The more correlated, the more risky ?
Consider• d lines of business,• simply a binomial distribution on each line of business, with small loss
probability (e.g. π = 1/1000).
Let
1 if there is a claim on line i
0 if not, and S = X1 + · · ·+Xd.
Will the correlation among the Xi’s increase the Value-at-Risk of S ?
Consider a probit model, i.e. Xi = 1(X?i ≤ ui), where X? ∼ N (0,Σ), i.e. a
Gaussian copula.
Assume that Σ = [σi,j ] where σi,j = ρ ∈ [−1, 1] when i 6= j.
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The more correlated, the more risky ?
Fig. 35 – 99.75% TVaR (or expected shortfall) for Gaussian copulas.
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The more correlated, the more risky ?
Fig. 36 – 99% TVaR (or expected shortfall) for Gaussian copulas.
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Arthur CHARPENTIER - Extremes and correlation in risk management
The more correlated, the more risky ?
What about other risk measures, e.g. Value-at-Risk ?
corr(Xi, Xj) ≤ corr(X ′i, X ′j) ; V aR(S, p) ≤ V aR(S′, p), for all p ∈ (0, 1).
(see e.g. Mittnik & Yener (2008)).
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The more correlated, the more risky ?
Fig. 37 – 99.75% VaR for Gaussian copulas.
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Arthur CHARPENTIER - Extremes and correlation in risk management
The more correlated, the more risky ?
Fig. 38 – 99% VaR for Gaussian copulas.
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Arthur CHARPENTIER - Extremes and correlation in risk management
The more correlated, the more risky ?
What could be the impact of tail dependence ?
Previously, we considered a Gaussian copula, i.e. tail independence. What if therewas tail dependence ?
Consider the case of a Student t-copula, with ν degrees of freedom.
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The more correlated, the more risky ?
Fig. 39 – 99.75% TVaR (or expected shortfall) for Student t-copulas.
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The more correlated, the more risky ?
Fig. 40 – 99% TVaR (or expected shortfall) for Student t-copulas.
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The more correlated, the more risky ?
Fig. 41 – 99.75% VaR for Student t-copulas.
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The more correlated, the more risky ?
Fig. 42 – 99% VaR for Student t-copulas.
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The more correlated, the more risky ?
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On the CEIPS recommendations
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On the CEIPS recommendations
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On the CEIPS recommendations
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On the CEIPS recommendations
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On the CEIPS recommendations
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On the CEIPS recommendations
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A first conclusion
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Arthur CHARPENTIER - Extremes and correlation in risk management
Another possible conclusion
• (standard) correlation is definitively not an appropriate tool to describedependence features,◦ in order to fully describe dependence, use copulas,◦ since major focus in risk management is related to extremal event, focus on
tail dependence meausres,• which copula can be appropriate ?◦ Elliptical copulas offer a nice and simple parametrization, based on pairwise
comparison,◦ Archimedean copulas might be too restrictive, but possible to introduce
Hierarchical Archimedean copulas,• Value-at-Risk might yield to non-intuitive results,◦ need to get a better understanding about Value-at-Risk pitfalls,◦ need to consider alternative downside risk measures (namely TVaR).
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