Avoiding Zero Probability Events When Computing Value at Risk Contributions: A Malliavin Calculus Approach
14 Pages Posted: 28 May 2020
Date Written: April 27, 2020
This paper is concerned with the process of risk allocation for a generic multivariate model when the risk measure is chosen as the Value-at-Risk (VaR). Making use of Malliavin calculus, we recast the traditional Euler contributions from an expectation conditional to an event of zero probability to a ratio of conditional expectations, where both the numerator and the denominator's conditioning events have positive probability. For several different models we show empirically that the estimator using this novel representation has no perceivable bias and variance smaller than a standard estimator used in practice.
Keywords: Risk Management, Capital Allocation, Malliavin Calculus
JEL Classification: G32, C15
Suggested Citation: Suggested Citation