Dependent tails

Document description

Both investment and insurance markets can show phenomena known as tail dependency. Two lines of business can appear to operate independently most of the time, but in adversity all lines deteriorate together. Even if we can estimate well the loss ratio for each class of business, how can we capture the correlation structure? This note proves some background on techniques for introducing correlations between lines of business. It answers the key questions:

- How can a user introduce correlations between arbitrary distributions?

- Does the chosen methodology matter?