ABSTRACT

In this chapter we wish to describe a complete model that complies with the requirements of the Advanced Measurement Approach and to illustrate it with an example based on the Quantitative Impact Study conducted by the banking supervisors. The language of the description is necessarily mathematical. We try to make the description self-contained, though this assumes that many facts are already known to most casual readers. The main themes are data modelling, simulation, risk measurement and results. Data modelling embraces the data model, an array of probability distributions to which the data is fitted with the pertinent techniques. Special emphasis is given to correlations, or associations, as these are crucial for a reasonable regulatory capital assessment. Risk mitigation is also treated, especially the modelling of standard insurance products.