Modeling Correlated Discrete Uncertainties in Event Trees with Copulas

33 Pages Posted: 18 Apr 2015

See all articles by Tianyang Wang

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

James Dyer

University of Texas at Austin

John Sibley Butler

University of Texas at Austin - Red McCombs School of Business

Date Written: September 3, 2014

Abstract

Abstract Modeling the dependence between uncertainties in decision and risk analyses is an important part of the problem structuring process. We focus on situations where correlated uncertainties are discrete, and extend the concept of the copula-based approach for modeling correlated continuous uncertainties to the representation of correlated discrete uncertainties. This approach reduces the required number of probability assessments significantly compared to approaches requiring direct estimates of conditional probabilities. It also allows the use of multiple dependence measures, including product moment correlation, rank order correlation and tail dependence, and parametric families of copulas such as normal copulas, t-copulas and Archimedean copulas. This approach can be extended to model the dependence between discrete and continuous uncertainties in the same event tree.

Keywords: Probabilistic risk analysis, decision analysis, event trees, discrete uncertainties, dependence, copulas

Suggested Citation

Wang, Tianyang and Dyer, James and Butler, John Sibley, Modeling Correlated Discrete Uncertainties in Event Trees with Copulas (September 3, 2014). Available at SSRN: https://ssrn.com/abstract=2491238 or http://dx.doi.org/10.2139/ssrn.2491238

Tianyang Wang (Contact Author)

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

James Dyer

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

John Sibley Butler

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
31
Abstract Views
335
PlumX Metrics