Simulation Methods for Compound Distributions

38 Pages Posted: 15 Mar 2022

See all articles by Ang Li

Ang Li

Western University, Canada

Jiandong Ren

University of Western Ontario

Date Written: January 16, 2022

Abstract

This paper studies in detail simulation methods for simulating tail probability and tail mean of both univariate and bivariate compound variables. We first reviewed some basic variance reduction methods, then we proposed several novel combinations of variance reduction methods specifically for compound distributions. We showed that the combinations of importance sampling, stratified sampling, conditioning, and control variates can greatly enhance the performance of the preliminary methods.

Keywords: Compound distribution, simulation, variance reduction method, tail probability, mean excess loss

JEL Classification: C15

Suggested Citation

Li, Ang and Ren, Jiandong, Simulation Methods for Compound Distributions (January 16, 2022). Available at SSRN: https://ssrn.com/abstract=4010059 or http://dx.doi.org/10.2139/ssrn.4010059

Ang Li (Contact Author)

Western University, Canada ( email )

Jiandong Ren

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

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