Avoiding zero probability events when computing Value at Risk contributions

Takaaki Koike, Yuri Saporito and Rodrigo Targino

Insurance: Mathematics and Economics, 2022, vol. 106, issue C, 173-192

Abstract: 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). We recast the traditional Euler contributions from an expectation conditional on an event of zero probability to a ratio involving conditional expectations whose conditioning events have strictly positive probability. We derive an analytical form of the proposed representation of VaR contributions for various parametric models. Our numerical experiments show that the estimator using this novel representation outperforms the standard Monte Carlo estimator in terms of bias and variance. Moreover, unlike the existing estimators, the proposed estimator is free from hyperparameters under a parametric setting.

Keywords: Risk management; Capital allocation; Value at Risk; Euler principle; Sensitivity analysis (search for similar items in EconPapers)
JEL-codes: C15 G21 G22 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Working Paper: Avoiding zero probability events when computing Value at Risk contributions (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:106:y:2022:i:c:p:173-192

DOI: 10.1016/j.insmatheco.2022.06.004

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