A Copula and Extreme-Value Based Methodology for Estimating the Required Economic Capital in a Retail-Credit Portfolio

Adan Diaz Hernandez; Jose Carlos Ramirez Sanchez

doi:10.4067/S0718-88702009000200004

Authors

Adan Diaz Hernandez University of Essex
Jose Carlos Ramirez Sanchez Universidad Anáhuac y CIDE

DOI:

https://doi.org/10.4067/S0718-88702009000200004

Keywords:

Economic capital, credit risk, copulas, extreme value theory

Abstract

This paper poses a new methodology to estimate the required economic capital for a retail-credit portfolio. The methodology is based on both the general copula concepts and some core results from the extreme value theory (EVT). The main results support the fact that the proposed methodology is more flexible than other traditional techniques, in particular when it makes use of elliptical generalized or grouped t Student copulas to model the dependence structure of risk-parameters or when it includes elements of the EVT to analyze the extreme losses behavior of a retail-credit portfolio. When applying algorithms, the paper includes data from a Mexican bank.

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Author Biographies

Adan Diaz Hernandez, University of Essex

University of Essex, UK, y consultor en Administración de Riesgos de varias instituciones financieras de México.

Jose Carlos Ramirez Sanchez, Universidad Anáhuac y CIDE

Profesor-Investigador del CADEN-Universidad Anáhuac México-Norte y profesor afiliado del Centro de Investigación y Docencia Económicas (CIDE).

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