Sequential Monte Carlo Samplers for Capital Allocation Under Copula-Dependent Risk Models

32 Pages Posted: 5 Oct 2014 Last revised: 18 Feb 2015

See all articles by Rodrigo Targino

Rodrigo Targino

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University; University College London - Department of Statistical Science; University of Oxford - Oxford-Man Institute of Quantitative Finance; London School of Economics & Political Science (LSE) - Systemic Risk Centre; University of New South Wales (UNSW) - Faculty of Science

Pavel V. Shevchenko

Macquarie University; Macquarie University, Macquarie Business School

Date Written: February 18, 2015

Abstract

In this paper we assume a multivariate risk model has been developed for a portfolio and its capital derived as a homogeneous risk measure. The Euler (or gradient) principle, then, states that the capital to be allocated to each component of the portfolio has to be calculated as an expectation conditional to a rare event, which can be challenging to evaluate in practice. We exploit the copula-dependence within the portfolio risks to design a Sequential Monte Carlo Samplers based estimate to the marginal conditional expectations involved in the problem, showing its efficiency through a series of computational examples.

Keywords: Risk Management, Capital Allocation, Sequential Monte Carlo (SMC), Copula Models

JEL Classification: C15, G21, G22

Suggested Citation

Targino, Rodrigo and Peters, Gareth and Shevchenko, Pavel V., Sequential Monte Carlo Samplers for Capital Allocation Under Copula-Dependent Risk Models (February 18, 2015). Insurance: Mathematics and Economics, Vol. 61, 2015, Available at SSRN: https://ssrn.com/abstract=2505539 or http://dx.doi.org/10.2139/ssrn.2505539

Rodrigo Targino (Contact Author)

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics ( email )

Praia de Botafogo
Rio de Janeiro, 22250-900
Brazil

HOME PAGE: http://https://sites.google.com/site/rodrigodossantostargino/

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University ( email )

Edinburgh Campus
Edinburgh, EH14 4AS
United Kingdom

HOME PAGE: http://garethpeters78.wixsite.com/garethwpeters

University College London - Department of Statistical Science ( email )

1-19 Torrington Place
London, WC1 7HB
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

University of Oxford Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

University of New South Wales (UNSW) - Faculty of Science ( email )

Australia

Pavel V. Shevchenko

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

HOME PAGE: http://www.businessandeconomics.mq.edu.au/contact_the_faculty/all_fbe_staff/pavel_shevchenko

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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