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

See all articles by David Ardia

David Ardia

HEC Montreal - Department of Decision Sciences

Attilio Meucci

ARPM - Advanced Risk and Portfolio Management

Date Written: February 7, 2015

Abstract

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

Ardia, David and Meucci, Attilio, Parametric Stress-Testing in Non-Normal Markets via Copula-Marginal Entropy Pooling (February 7, 2015). Risk Magazine, June 2015, Available at SSRN: https://ssrn.com/abstract=2457459 or http://dx.doi.org/10.2139/ssrn.2457459

David Ardia (Contact Author)

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Attilio Meucci

ARPM - Advanced Risk and Portfolio Management ( email )

HOME PAGE: http://www.arpm.co/

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