Measuring Portfolio Risk Under Partial Dependence Information

39 Pages Posted: 9 Mar 2014 Last revised: 17 Jun 2016

Carole Bernard

Grenoble Ecole de Management

Michel Denuit

Catholic University of Louvain

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Date Written: June 16, 2016

Abstract

The bounds for risk measures of a portfolio when its components have known marginal distributions but the dependence among the risks is unknown are often too wide to be useful in practice. Moreover, availability of additional dependence information, such as knowledge of some higher-order moments, makes the problem significantly more difficult. We show that replacing knowledge of the marginal distributions with knowledge of the mean of the portfolio does not result in significant loss of information when estimating bounds on Value-at-Risk. These results are used to assess the margin by which total capital can be underestimated when using the Solvency II or RBC capital aggregation formulas.

Keywords: Stochastic dominance, Moment space, s-convex order, Value-at-Risk

JEL Classification: C60

Suggested Citation

Bernard, Carole and Denuit, Michel and Vanduffel, Steven, Measuring Portfolio Risk Under Partial Dependence Information (June 16, 2016). Available at SSRN: https://ssrn.com/abstract=2406377 or http://dx.doi.org/10.2139/ssrn.2406377

Carole Bernard

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Michel Denuit

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium

Steven Vanduffel (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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