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Pareto Models for Risk Management

In: Recent Econometric Techniques for Macroeconomic and Financial Data

Author

Listed:
  • Arthur Charpentier

    (Université du Québec à Montréal (UQAM))

  • Emmanuel Flachaire

    (Aix-Marseille Université AMSE, CNRS and EHESS)

Abstract

The Pareto model is very popular in risk management, since simple analytical formulas can be derived for financial downside risk measures (value-at-risk, expected shortfall) or reinsurance premiums and related quantities (large claim index, return period). Nevertheless, in practice, distributions are (strictly) Pareto only in the tails, above (possible very) large threshold. Therefore, it could be interesting to take into account second-order behavior to provide a better fit. In this article, we present how to go from a strict Pareto model to Pareto-type distributions. We discuss inference, derive formulas for various measures and indices, and finally provide applications on insurance losses and financial risks.

Suggested Citation

  • Arthur Charpentier & Emmanuel Flachaire, 2021. "Pareto Models for Risk Management," Dynamic Modeling and Econometrics in Economics and Finance, in: Gilles Dufrénot & Takashi Matsuki (ed.), Recent Econometric Techniques for Macroeconomic and Financial Data, pages 355-387, Springer.
    • Handle: RePEc:spr:dymchp:978-3-030-54252-8_14
    DOI: 10.1007/978-3-030-54252-8_14
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    EPD; Expected shortfall; Financial risks; GPD; Hill; Pareto; Quantile; Rare events; Regular variation; Reinsurance; Second order; Value-at-risk;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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