Risk concentration under second order regular variation

DOI10.1007/S10687-020-00382-3MaRDI QIDQ2198597zbMATH OpenOpenAlexFDO

Authors Bikramjit Das, Marie Kratz

Publication date 10 September 2020

Published in Extremes (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1704.02609

zbMATH Keywords

asymptotic theorydiversification benefitmultivariate second order regular variationrate of convergencerisk concentrationvalue-at-risk

Mathematics Subject Classification ID

Probability distributions: general theory (60E05) Central limit and other weak theorems (60F05) Extreme value theory; extremal stochastic processes (60G70) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Abstract: Measures of risk concentration and their asymptotic behavior for portfolios with heavy-tailed risk factors is of interest in risk management. Second order regular variation is a structural assumption often imposed on such risk factors to study their convergence rates. In this paper, we provide the asymptotic rate of convergence of the measure of risk concentration for a portfolio of heavy-tailed risk factors, when the portfolio admits the so-called second order regular variation property. Moreover, we explore the relationship between multivariate second order regular variation for a vector (e.g., risk factors) and the second order regular variation property for the sum of its components (e.g., the portfolio of risk factors). Results are illustrated with a variety of examples.

Review text

The article assesses the limit behaviour of the measure of risk concentration for value-at-risk of the sum of risk factors under the assumption that the sum is second order regularly varying and identifies conditions under which multivariate second order regularly variation for a vector would imply second order regular variation property for the sum of its components, so that the rate of convergence of risk concentration measures could be obtained in such cases. An alternate definition of univariate second order regular variation is given. Assuming second order regular variation for the sum of the components of a random vector in \(\mathbb{R}_{+}^{d},\) the convergence rate of the diversification benefit for the value-at-risk measure is found. The effect of multivariate second order regular variation on aggregation is explored and sufficient conditions on a vector satisfying multivariate second order regular variation for the sum of its components to satisfy a second order regular variation property are provided and the conditions are shown not to be necessary. Examples and illustrations are provided throughout to explain the theoretical results in the article.

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Cited in

(14)

• Superquantile/CVaR risk measures: second-order theory
• Second-order asymptotics of the risk concentration of a portfolio with deflated risks
• First and second order asymptotics of the spectral risk measure for portfolio loss under multivariate regular variation
• Risk concentration of aggregated dependent risks: the second-order properties
• Asymptotics of the risk concentration based on the tail distortion risk measure
• Second-order properties of risk concentrations without the condition of asymptotic smoothness
• Second-order expansions of the risk concentration based on CTE
• Convolutions of heavy-tailed random variables and applications to portfolio diversification and \(\text{MA}(1)\) time series
• Bounds for randomly shared risk of heavy-tailed loss factors
• Properties of second-order regular variation and expansions for risk concentration
• Multi-normex distributions for the sum of random vectors. Rates of convergence
• Second order regular variation and conditional tail expectation of multiple risks
• Risk concentration and diversification: second-order properties
• Marginal expected shortfall inference under multivariate regular variation

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