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Pareto models for risk management

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  • Arthur Charpentier
  • Emmanuel Flachaire

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, and derive formulas for various measures and indices, and finally provide applications on insurance losses and financial risks.

Suggested Citation

  • Arthur Charpentier & Emmanuel Flachaire, 2019. "Pareto models for risk management," Papers 1912.11736, arXiv.org.
    • Handle: RePEc:arx:papers:1912.11736
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    References listed on IDEAS

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    1. Resnick, Sidney I., 1997. "Discussion of the Danish Data on Large Fire Insurance Losses," ASTIN Bulletin, Cambridge University Press, vol. 27(1), pages 139-151, May.
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    Cited by:

    1. Yıldırım Külekci, Bükre & Korn, Ralf & Selcuk-Kestel, A. Sevtap, 2024. "Ruin probability for heavy-tailed and dependent losses under reinsurance strategies," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 226(C), pages 118-138.

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    More about this item

    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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