Matching a distribution by matching quantiles estimation

Nikolaos Sgouropoulos, Qiwei Yao and Claudia Yastremiz

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Motivated by the problem of selecting representative portfolios for backtesting counterparty credit risks, we propose a matching quantiles estimation (MQE) method for matching a target distribution by that of a linear combination of a set of random variables. An iterative procedure based on the ordinary least squares estimation (OLS) is proposed to compute MQE. MQE can be easily modified by adding a LASSO penalty term if a sparse representation is desired, or by restricting the matching within certain range of quantiles to match a part of the target distribution. The convergence of the algorithm and the asymptotic properties of the estimation, both with or without LASSO, are established. A measure and an associated statistical test are proposed to assess the goodness-of-match. The finite sample properties are illustrated by simulation. An application in selecting a counterparty representative portfolio with a real data set is reported. The proposed MQE also finds applications in portfolio tracking, which demonstrates the usefulness of combining MQE with LASSO.

Keywords: goodness-of-match; LASSO; ordinary least-squares estimation; portfolio tracking; representative portfolio; sample quantile (search for similar items in EconPapers)
JEL-codes: C1 E6 (search for similar items in EconPapers)
Date: 2015-06-01
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of the American Statistical Association, 1, June, 2015, 110(510), pp. 742 - 759. ISSN: 0162-1459

Downloads: (external link)
http://eprints.lse.ac.uk/57221/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:57221

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().