On the Distortion of a Copula and its Margins
Emiliano A. Valdez
University of Connecticut
Renmin University of China - School of Statistics
April 11, 2010
Scandinavian Actuarial Journal, Forthcoming
This article examines the notion of distortion of copulas, a natural extension of distortion within the univariate framework. We study three approaches to this extension: (1) distortion of the margins alone while keeping the original copula structure, (2) distortion of the margins while simultaneously altering the copula structure, and (3) synchronized distortion of the copula and its margins. When applying distortion within the multivariate framework, it is important to preserve the properties of a copula function. For the first two approaches, this is a rather straightforward result, however for the third approach, the proof has been exquisitely constructed in Morillas (2005). These three approaches of multivariate distortion unify the different types of multivariate distortion that have scarcely scattered in the literature. Our contribution in this paper is to further consider this unifying framework: we give numerous examples to illustrate and we examine their properties particularly with some aspects of ordering multivariate risks. The extension of multivariate distortion can be practically implemented in risk management where there is a need to perform aggregation and attribution of portfolios of correlated risks. Furthermore, ancillary to the results discussed in this article, we are able to generalize the formula developed by Genest and Rivest (2001) for computing the distribution of the probability integral transformation of a random vector and extend it to the case within the distortion framework. For purposes of illustration, we applied the distortion concept to value excess of loss reinsurance for an insurance policy where the loss amount could vary by type of loss.
Number of Pages in PDF File: 25
Keywords: Multivariate Distortion, Ordering of Risks, Probability Integral Transformation, Excess of Loss Reinsurance
JEL Classification: C49Accepted Paper Series
Date posted: December 20, 2009 ; Last revised: February 24, 2011
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