Model-free bounds on value-at-risk using extreme value information and statistical distances

DOI10.1016/J.INSMATHECO.2019.01.007MaRDI QIDQ2415965zbMATH OpenOpenAlexWikidataFDO

Authors Thibaut Lux, Antonis Papapantoleon

Publication date 23 May 2019

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

Full work available at URL https://arxiv.org/abs/1610.09734

zbMATH Keywords

copulasdependence uncertaintydistance to reference copuladistribution of maxima and minimaimproved Fréchet-Hoeffding boundsrearrangement algorithmreduction principlevalue-at-risk bounds

Mathematics Subject Classification ID

Probability distributions: general theory (60E05) Characterization and structure theory for multivariate probability distributions; copulas (62H05) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Abstract: We derive bounds on the distribution function, therefore also on the Value-at-Risk, of $varphi(mathbfX)$ where $varphi$ is an aggregation function and $mathbfX=(X_1,dots,X_d)$ is a random vector with known marginal distributions and partially known dependence structure. More specifically, we analyze three types of available information on the dependence structure: First, we consider the case where extreme value information, such as the distributions of partial minima and maxima of $mathbfX$, is available. In order to include this information in the computation of Value-at-Risk bounds, we utilize a reduction principle that relates this problem to an optimization problem over a standard Fr'echet class, which can then be solved by means of the rearrangement algorithm or using analytical results. Second, we assume that the copula of $mathbfX$ is known on a subset of its domain, and finally we consider the case where the copula of $mathbfX$ lies in the vicinity of a reference copula as measured by a statistical distance. In order to derive Value-at-Risk bounds in the latter situations, we first improve the Fr'echet--Hoeffding bounds on copulas so as to include this additional information on the dependence structure. Then, we translate the improved Fr'echet--Hoeffding bounds to bounds on the Value-at-Risk using the so-called improved standard bounds. In numerical examples we illustrate that the additional information typically leads to a significant improvement of the bounds compared to the marginals-only case.

Recommendations

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Cited in

(15)

• A review on ambiguity in stochastic portfolio optimization
• Risk bounds with additional information on functionals of the risk vector
• On the class of truncation invariant bivariate copulas under constraints
• A hitchhiker's guide to quasi-copulas
• Detection of arbitrage opportunities in multi-asset derivatives markets
• Reduction of Value-at-Risk bounds via independence and variance information
• NONPARAMETRIC ESTIMATION OF CONDITIONAL VALUE-AT-RISK AND EXPECTED SHORTFALL BASED ON EXTREME VALUE THEORY
• Marginal and dependence uncertainty: bounds, optimal transport, and sharpness
• Value-at-risk bounds with two-sided dependence information
• Value-at-Risk, Tail Value-at-Risk and upper tail transform of the sum of two counter-monotonic random variables
• Multivariate copulas with given values at two arbitrary points
• Upper comonotonicity and risk aggregation under dependence uncertainty
• Probability inequalities for sums of partly acceptable random variables with finite moments
• Tail similarity
• Measuring exposure to dependence risk with random Bernstein copula scenarios

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