Extremal Dependence Concepts

34 Pages Posted: 14 May 2014 Last revised: 12 Jun 2015

See all articles by Giovanni Puccetti

Giovanni Puccetti

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM)

Ruodu Wang

University of Waterloo - Department of Statistics and Actuarial Science

Date Written: June 10, 2015

Abstract

The probabilistic characterization of the relationship between two or more random variables calls for a notion of dependence. Dependence modeling leads to mathematical and statistical challenges; recent developments in extremal dependence concepts have drawn a lot of attention in probability and its applications in several disciplines. The aim of this paper is to review various concepts of extremal positive and negative dependence, including several recently established results, reconstruct their history, link them to probabilistic optimization problems, and provide a list of open questions in this area. While the concept of extremal positive dependence is agreed upon for random vectors of arbitrary dimensions, various notions of extremal negative dependence arise when more than two random variables are involved. We review existing popular concepts of extremal negative dependence given in the literature and introduce a novel notion, which in a general sense includes the existing ones as particular cases. Even if much of the literature on dependence is actually focused on positive dependence, we show that negative dependence plays an equally important role in the solution of many optimization problems. While the most popular tool used nowadays to model dependence is that of a copula function, in this paper we use the equivalent concept of a set of rearrangements and this not only for historical reasons. Rearrangement functions describe the relationship between random variables in a completely deterministic way and this implies several advantages on the approximation of solutions in a broad class of optimization problems and allows a deeper understanding of dependence itself.

Keywords: Dependence Modeling, Rearrangements, Copulas, Comonotonicity, Countermonotonicity, Mutual Exclusivity, Joint Mixability

Suggested Citation

Puccetti, Giovanni and Wang, Ruodu, Extremal Dependence Concepts (June 10, 2015). Available at SSRN: https://ssrn.com/abstract=2436392 or http://dx.doi.org/10.2139/ssrn.2436392

Giovanni Puccetti

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

Ruodu Wang (Contact Author)

University of Waterloo - Department of Statistics and Actuarial Science ( email )

Waterloo, Ontario N2L 3G1
Canada

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