Tail risk driven by investment losses and exogenous shocks

Consider a company whose business carries the potential for investment losses and is additionally vulnerable to exogenous shocks. The unpredictability of the shocks makes it challenging for both the company and the regulator to accurately assess their impact, potentially leading to an underestimatio...

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Bibliographic Details
Published in:ASTIN Bulletin : The Journal of the IAA 2024-09, Vol.54 (3), p.712-737
Main Authors: Man, Xinyue, Tang, Qihe
Format: Article
Language:English
Subjects:
Bankruptcy
Climate change
COVID-19
Regulatory reform
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Summary:Consider a company whose business carries the potential for investment losses and is additionally vulnerable to exogenous shocks. The unpredictability of the shocks makes it challenging for both the company and the regulator to accurately assess their impact, potentially leading to an underestimation of solvency capital when employing traditional approaches. In this paper, we utilize a stylized model to conduct an extreme value analysis of the tail risk of the company under a Fréchet-type and a Gumbel-type shock. Our main results explicitly demonstrate the different roles of investment risk and shock risk in driving large losses. Furthermore, we derive asymptotic estimates for the value at risk and expected shortfall of the total loss. Numerical studies are conducted to examine the accuracy of the obtained estimates.
ISSN:0515-0361
1783-1350
DOI:10.1017/asb.2024.25