Introduction to Economic Capital Management and Modelling

Analyze late 16th to early 17th century regulation, comparing Holland's secure, collateral-backed approach with Spain's lax regulation and its impact on financial innovation and outcomes.

Explore the Basel accords from Basel I to Basel IV, detailing capital requirements, risk-weighted assets, and buffers. Learn how securitization, leverage, liquidity, and internal models shape bank resilience and disclosure.

Explore Solvency II as the capital and risk framework for insurance companies, detailing the two-tier capital requirements, ORSA, liquidity management, and reporting to prevent license risk.

Define objectives and validate assumptions, inputs, and parameters for actuarial models. Explain how outputs and conclusions guide decisions, and how stakeholders from executives to interns interact with the mortality model.

Models carry limitations; garbage in, garbage out means bad data yields bad output. Treat models with care, using clean data, acknowledging costs, overconfidence risk, simplifications, incomplete data, bias, model risk.

Explore sensitivity, scenario, and stress testing for actuarial models, evaluating how parameter changes affect outputs, plausible future events, and portfolio robustness under extreme conditions.

Explore risk as the consequence of uncertainty and understand its six dimensions (event, duration, frequency, severity, correlation, and capital) and how they guide risk assessment and management.

Explore the mathematical properties of risk measures, including coherence and convexity. Learn how monotonicity, subadditivity, positive homogeneity, and translation invariance shape risk and support diversification.

Learn how copulas convert marginal distributions into a joint distribution using generator functions and their inverses, quantify correlation with alpha, and model diverse risks from market to credit.

Explore the garch model for volatility estimation, detailing alpha and beta dynamics, the stability condition alpha plus beta less than 1, long-run variance, and volatility clustering.

Explore the Merton model, linking equity and debt through the Black-Scholes framework to estimate default probability and credit spreads, with equity as a call and debt as a put.

Examine the Merton model's drawbacks: frictionless market assumptions, observable asset values, deterministic risk-free rate, and debt as a zero coupon, plus missed scenarios like rights issues or bailouts.