Model Uncertainty and Scenario Aggregation

Mathieu Cambou and Damir Filipovic
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Mathieu Cambou: Ecole Polytechnique Fédérale de Lausanne
Damir Filipovic: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute

No 14-38, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper provides a coherent method for scenario aggregation addressing model uncertainty. It is based on divergence minimization from a reference probability measure subject to scenario constraints. An example from regulatory practice motivates the definition of five fundamental criteria that serve as a basis for our method. Standard risk measures, such as value-at-risk and expected shortfall, are shown to be robust with respect to minimum divergence scenario aggregation. Various examples illustrate the tractability of our method.

Keywords: model uncertainty; scenario aggregation; expected shortfall; value-at-risk; statistical divergence; Swiss Solvency Test (search for similar items in EconPapers)
Pages: 34 pages
Date: 2014-05, Revised 2015-11
New Economics Papers: this item is included in nep-rmg and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1438

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