Model Risk In Financial Markets: From Financial Engineering To Risk Management by Tunaru Radu

Author:Tunaru, Radu
Language: eng
Format: epub
Publisher: World Scientific Publishing Company

Fig. 8.1: Comparison of VaR and ES for Gaussian and Student’s distributions under Solvency II and the Swiss Solvency Test.

same horizon. Figure 8.1 describes the VaR at 99.5% and the ES at 99% for the Gaussian case and for the Student’s distributions with 5 and 2 degrees of freedom respectively. Several important conclusions can be drawn based on these graphs. While for small values of the standard deviation parameter σ there is no significant difference between the two measures of solvency for the Gaussian distribution, the difference increases with σ, for all three models. In addition, it is clear that different models will lead to different risk level calculations. Therefore, while at a superficial level it looks like there is not much discrepancy between Solvency II and the SST, this difference may actually be quite significant.

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