Archive for the ‘Risk Measurement’ Category
[Technical Post] On Friday, a Vice President in our company asked me what our definition of Economic Capital was. I responded that we defined “economic capital” as the amount of capital necessary to cover unexpected losses at the 99% confidence level. That is total and complete gibberish. I have no idea what it means, I just mirror the sentence structure used by others. For examples, see Investopedia, and other sources.
Investopedia also provides a standard graphical representation, produced below:
Below I will describe why my definition is gibberish, I will contrast this to what we are really trying to say, and I’ll close by saying that this is more than a semantics problem.