Scenario Based Principal Component Value-at-Risk: An Application to Italian Banks' Interest Rate Risk Exposure

Fiori, Roberta; Iannotti, Simonetta

doi:10.2139/ssrn.935028

Cited by 22 publications

(7 citation statements)

References 109 publications

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“…We calibrate the stress interest rate scenarios using principal component analysis (PCA) as prescribed by EIOPA [26]. To transform the principal components and eigenvectors into a VaR and an ES, we use the method described by Fiori and Iannotti [27]. We describe and discuss the method we use in Appendix 2.…”

Section: Calibrating the Scr Stress Scenariosmentioning

confidence: 99%

“…PCA is used to describe movements of the yield curve and is explained by Fiori and Iannotti [27] and Barber and Copper [5]. It applies an orthogonal linear transformation that converts interest rate changes data of correlated variables into a set of values of linearly uncorrelated variables.…”

Section: Other Regulatory Frameworkmentioning

confidence: 99%

“…To transform the principal components and eigenvectors into VaR and ES based interests rate stress scenarios, we use a method of Fiori and Iannotti [27]. For a maturity k, we regress the relative annual percentage rate changes on the principal components to derive the ''beta'' sensitivity of each rate to each principal component via (14).…”

Section: Other Regulatory Frameworkmentioning

confidence: 99%

“…. ; K and determine the empirical distribution of P K k¼1b k U k accordingly (see, e.g., [27]). We use 4000 simulations for each dataset.…”

Section: Other Regulatory Frameworkmentioning

confidence: 99%

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Solvency II Solvency Capital Requirement for Life Insurance Companies Based on Expected Shortfall

Boonen

2015

SSRN Journal

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This paper examines the consequences for a life annuity insurance company if the solvency II solvency capital requirements (SCR) are calibrated based on expected shortfall (ES) instead of value-at-risk (VaR). We focus on the risk modules of the SCRs for the three risk classes equity risk, interest rate risk and longevity risk. The stress scenarios are determined using the calibration method proposed by EIOPA in 2014. We apply the stress-scenarios for these three risk classes to a fictitious life annuity insurance company. We find that for EIOPA's current quantile 99.5% of the VaR, the stress scenarios of the various risk classes based on ES are close to the stress scenarios based on VaR. Might EIOPA choose to calibrate the stress scenarios on a smaller quantile, the longevity SCR is relatively larger and the equity SCR is relatively smaller if ES is used instead of VaR. We derive the same conclusion if stress scenarios are determined with empirical stress scenarios.

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Section: Calibrating the Scr Stress Scenariosmentioning

confidence: 99%

Section: Other Regulatory Frameworkmentioning

confidence: 99%

Section: Other Regulatory Frameworkmentioning

confidence: 99%

“…. ; K and determine the empirical distribution of P K k¼1b k U k accordingly (see, e.g., [27]). We use 4000 simulations for each dataset.…”

Section: Other Regulatory Frameworkmentioning

confidence: 99%

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Solvency II Solvency Capital Requirement for Life Insurance Companies Based on Expected Shortfall

Boonen

2015

SSRN Journal

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“…Gibson and Pritsker (2000) pointed out that an appropriate choice of risk factors is crucial for this methodology, and also advocated using a continuous distribution to model the extracted risk factors. In Fiori and Iannotti (2007), the authors apply principal component analysis (PCA) to Monte Carlo simulation considering the non-normality of historical observations. Another approach is suggested in Chen et al (2007) where the authors use independent component analysis (ICA), a tool utilized in sound engineering, to calculate VaR for foreign exchange rate portfolios.…”

Section: Introductionmentioning

confidence: 99%

Value-at-Risk for fixed-income portfolios: a Kalman filtering approach

Date

Bustreo

2015

IMA J Management Math

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We propose a way of measuring the risk of a sovereign debt portfolio by using a simple two-factor short rate model. The model is calibrated from data and then the changes in the bond prices are simulated by using a Kalman filter. The bond prices being simulated remain arbitrage-free, in contrast with principal component analysis based strategies for simulation and risk measurement of debt portfolios. In liquid sovereign debt markets, a risk measurement methodology which allows the future bond price scenarios to be arbitrage-free may be seen as a potentially more realistic way of measuring the debt portfolio risk due to interest rate fluctuations. We demonstrate the performance of this methodology with calibration and backtesting, both on simulated data as well as on a real portfolio of US government bonds.

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Solvency II solvency capital requirement for life insurance companies based on expected shortfall

Boonen

2017

Eur. Actuar. J.

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This paper examines the consequences for a life annuity insurance company if the solvency II solvency capital requirements (SCR) are calibrated based on expected shortfall (ES) instead of value-at-risk (VaR). We focus on the risk modules of the SCRs for the three risk classes equity risk, interest rate risk and longevity risk. The stress scenarios are determined using the calibration method proposed by EIOPA in 2014. We apply the stress-scenarios for these three risk classes to a fictitious life annuity insurance company. We find that for EIOPA’s current quantile 99.5% of the VaR, the stress scenarios of the various risk classes based on ES are close to the stress scenarios based on VaR. Might EIOPA choose to calibrate the stress scenarios on a smaller quantile, the longevity SCR is relatively larger and the equity SCR is relatively smaller if ES is used instead of VaR. We derive the same conclusion if stress scenarios are determined with empirical stress scenarios.

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Scenario Based Principal Component Value-at-Risk: An Application to Italian Banks' Interest Rate Risk Exposure

Cited by 22 publications

References 109 publications

Solvency II Solvency Capital Requirement for Life Insurance Companies Based on Expected Shortfall

Solvency II Solvency Capital Requirement for Life Insurance Companies Based on Expected Shortfall

Value-at-Risk for fixed-income portfolios: a Kalman filtering approach

Solvency II solvency capital requirement for life insurance companies based on expected shortfall

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