Multiple risk factor dependence structures: copulas and related properties

DOI10.1016/J.INSMATHECO.2017.03.003MaRDI QIDQ2397858zbMATH OpenOpenAlexFDO

Authors Jianxi Su, Edward Furman

Publication date 24 May 2017

Published in Insurance Mathematics \& Economics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1610.02126

zbMATH Keywords

factor modelsArchimedean copulasmultivariate distributionsdefault riskMarshall-Olkin copulas(tail) dependence

Mathematics Subject Classification ID

Multivariate distribution of statistics (62H10) Characterization and structure theory for multivariate probability distributions; copulas (62H05) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Abstract: Copulas have become an important tool in the modern best practice Enterprise Risk Management, often supplanting other approaches to modelling stochastic dependence. However, choosing the `right' copula is not an easy task, and the temptation to prefer a tractable rather than a meaningful candidate from the encompassing copulas toolbox is strong. The ubiquitous applications of the Gaussian copula is just one illuminating example. Speaking generally, a `good' copula should conform to the problem at hand, allow for asymmetry in the domain of definition and exhibit some extent of tail dependence. In this paper we introduce and study a new class of Multiple Risk Factor (MRF) copula functions, which we show are exactly such. Namely, the MRF copulas (1) arise from a number of meaningful default risk specification with stochastic default barriers, (2) are in general non-exchangeable and (3) possess a variety of tail dependences. That being said, the MRF copulas turn out to be surprisingly tractable analytically.

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Cited in

(7)

• Multivariate Fréchet copulas and conditional value-at-risk
• Multiple risk factor dependence structures: distributional properties
• Livestock mortality catastrophe insurance using fatal shock process
• A statistical methodology for assessing the maximal strength of tail dependence
• A general approach to full-range tail dependence copulas
• Tail maximal dependence in bivariate models: estimation and applications
• Economic and financial risk factors, copula dependence and risk sensitivity of large multi-asset class portfolios

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