Tail behavior of sums and differences of log-normal random variables (Q5963508): Difference between revisions

Motivated by problems in risk management, this paper addresses asymptotic approximations for the tail behaviour of sums and differences of log-normal random variables. Section 2 focuses on the left tail of a sum of correlated log-normal random variables. Asymptotic formulas for the distribution function and density are developed under mild conditions on the covariance structure. These results complement those developed for the right tail by \textit{S. Asmussen} and \textit{L. Rojas-Nandayapa} [Stat. Probab. Lett. 78, No. 16, 2709--2714 (2008; Zbl 1151.60009)] and indicate a very different type of behaviour where, for the left tail, the correlation structure is important. In Section 3, a right tail approximation for the difference of two log-normal sums is derived. The approximations can be used directly or to construct variance reduction procedures to estimate the tail probabilities via Monte Carlo techniques. In Section 4, an efficient importance sampling technique is described for the evaluation of the tail event probabilities via Monte Carlo methods. Section 5 applies the approximations to risk management issues, such as stress tests, developed in the context of the multidimensional Black-Scholes model. A sharp asymptotic formula is developed for the value at risk when the confidence level tends to one.