Parametric Stress-Testing in Non-Normal Markets via Copula-Marginal Entropy Pooling
Risk Magazine, June 2015
23 Pages Posted: 23 Jun 2014 Last revised: 5 Aug 2015
Date Written: February 7, 2015
A novel approach for stress-testing (portfolios of) financial assets is presented. The technique extends the parametric Entropy Pooling approach to skewed and thick-tailed markets. The technique rests on a copula-marginal decomposition for the entropy together with several approximation schemes which renders the numerical computations feasible for real-life problems. An illustration with a portfolio of European options is presented.
Keywords: Entropy Pooling, Kullback-Leibler, copula-marginal, stress-test, risk
JEL Classification: C1, G11
Suggested Citation: Suggested Citation