An Introduction to Economic Capital - Risk Books
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An Introduction to Economic Capital

By Mohan Bhatia


With the Basel II and Solvency II framework in place, all types of financial intermediaries are preparing to implement economic capital measurement at some level of granularity.

Publish date: 1 Jul 2009

Availability: In stock

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An Introduction to Economic Capital

Book description

This addition to the Risk Books Introductory Series identifies the basic building blocks for economic capital measurement. It familiarises and trains a newcomer to the economic capital building blocks, computation approaches and taxonomy, risk measures, risk aggregation, distribution, correlation and dependency structures, risk mitigation, simulation and basic modelling techniques necessary for an institution to invent their own techniques and parameters for modelling economic capital for various types of risks.

The primer format will enable new entrants to quickly grasp the fundamental concepts, and covers:

  • Economic capital: the purpose and objectives
  • Credit risk
  • Insurance risk
  • Market risk
  • Operational risk
  • Liquidity risk
  • Correlations and approximations

Recommended for risk managers, compliance officers, information technology planners and implementers, front and middle office personnel and students of Financial Engineering and Financial Risk Management courses.

Book details

Book 9781906348090XY / EBook 9781906348984
Publish date
1 Jul 2009
155mm x 235mm

Author biography

Mohan Bhatia

Mohan Bhatia MS, FRM is Managing Principal heading Risk, Performance and Compliance Practice at Oracle Financial Services Consulting spearheading consulting for Basel II, Solvency II, Risk quantification and Compliance for BFSI. Mohan has provided consulting to tens of institutions in Americas, Europe, Middle East, Africa and Asia Pacific enabling them to measure and manage risk, performance and compliance. Mohan is co-editor of Journal of Risk Model Validation.

Table of contents

1. Economic Capital

Economic capital distribution

Regulatory capital versus economic capital

Economic capital aggregation

Issues of model risk


2. Credit Risk

Revisiting the Basel II model

Challenges and approximations of the Basel II model

Extending the Basel II model

Extending the Basel II model for sector concentration

Stochastic process

Markovian process

Building transition matixes

Regime shifting

Dependency structures


Credit spreads

Unbundling the shape of a credit spread curve

Modelling correlation

Counterparty risk

Building the counterparty exposure profile


3. Insurance Risk

Insurance risks

Solvency II

Internal models


4. Market Risk

Stylised facts about market risk

Pricing, returns and risk premiums

Common characteristics of financial time series

Risk premiums

A common approach to derive EWMA, ARMA, ARCH and GARCH

Stochastic volatility models

Challenge of EWMA, ARMA, ARCH and GARCH models



Recommended best practices for VaR models

Evaluation VaR models


5. Operational Risk

Overview of advanced measurement approach

Issues and challenges concerning loss data

Extreme-value theory

Modelling insurance


6. Liquidity Risk

Market liquidity risk equals systemic liquidity risk

Measuring funding liquidity risk

Measuring market liquidity risk premium – internal models for liquidity risk

Market liquidity risk premium

Implementing contingency liquidity risk planning


7. Correlation

Covariance, correlation and co-movement

Extremes have strong co-movements

Approaches to measuring correlation

Modelling tail dependence


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