Dependency between Risks and the Insurer’s Economic Capital: A Copula-based GARCH Model

Jeungbo Shim, Seung-Hwan Lee
Asia-Pacific Journal of Risk and Insurance,Vol. 11, Issue 1,

Copulas can be a useful tool to capture heavy-tailed dependence between risks in estimating economic capital. This paper provides a procedure of combining copula with GARCH model to construct a multivariate distribution. The copula-based GARCH model using a skewed student’s t-distribution controls for the issues of skewness, heavy tails, volatility clustering and conditional dependencies contained in the financial time series data. Using the sample of US property liability insurance industry, we perform Monte Carlo …
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