Making Cornish–Fisher Distributions Fit
59 Pages Posted: 1 Oct 2016
Date Written: September 30, 2016
The truncated Cornish–Fisher inverse expansion is well known. It is used, for example, to approximate value-at-risk and conditional value-at-risk. It is known that this expansion gives a distribution for limited skewness and kurtosis and that the distribution may be a poor fit. drawing on Maillard (2012) we show how to find a unique corrected Cornish–Fisher distribution efficiently for a wide range of skewness and kurtosis. We show it has a unimodal density and a quantile function that is twice continuously differentiable as a function of mean, variance, skewness and kurtosis. We show how to obtain random variates efficiently and how to test goodness-of-fit. We apply the Cornish–Fisher distribution to fit hedge-fund returns and estimate conditional value-at risk. Finally, we investigate various generalisations of the Cornish–Fisher distributions and show they do not have the same desirable properties.
Keywords: Conditional value-at-risk, Goodness-of-fit, Kurtosis, Random variates, Skewness
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