Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Archive for the ‘Risk Measurement’ Category

Nonsensical Definitions of Economic Capital

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[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.[1]

Investopedia also provides a standard graphical representation, produced below:

econcapital

 

 

 

 

 

 

 

 

 

 

 

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.

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Written by Victor

September 1, 2014 at 5:37 pm