Risk measures under model uncertainty: a Bayesian viewpoint

DOI10.3934/FMF.2023017MaRDI QIDQ6147108zbMATH OpenOpenAlexFDO

Authors Christa Cuchiero, Irene Klein

Publication date 15 January 2024

Published in Frontiers of Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2204.07115

zbMATH Keywords

Bayesian methods in financemixture probability measuremodel riskrisk measuresrobust finance

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70)

Abstract: We introduce two kinds of risk measures with respect to some reference probability measure, which both allow for a certain order structure and domination property. Analyzing their relation to each other leads to the question when a certain minimax inequality is actually an equality. We then provide conditions under which the corresponding robust risk measures, being defined as the supremum over all risk measures induced by a set of probability measures, can be represented classically in terms of one single probability measure. We focus in particular on the mixture probability measure obtained via mixing over a set of probability measures using some prior, which represents for instance the regulator's beliefs. The classical representation in terms of the mixture probability measure can then be interpreted as a Bayesian approach to robust risk measures.

Review text

The authors introduce two kinds of risk measures with respect to some reference probability measure, which both allow for a certain order structure and domination property. Conditions are provided under which the corresponding robust risk measures, being defined as the supremum over all risk measures induced by a set of probability measures, can be represented classically in terms of one single probability measure. The authors focus on the mixture probability measure obtained via mixing over a set of probability measures using some prior, which represents for instance the regulator's beliefs. The classical representation in terms of the mixture probability measure can then be interpreted as a Bayesian approach to robust risk measures.

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Cited in

(1)

• A framework for measures of risk under uncertainty

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