Efficient risk simulations for linear asset portfolios in the t-copula model

Halis Sak, Wolfgang Hörmann and Josef Leydold

European Journal of Operational Research, 2010, vol. 202, issue 3, 802-809

Abstract: We consider the problem of calculating tail probabilities of the returns of linear asset portfolios. As a flexible and accurate model for the logarithmic returns we use the t-copula dependence structure and marginals following the generalized hyperbolic distribution. Exact calculation of the tail-loss probabilities is not possible and even simulation leads to challenging numerical problems. Applying a new numerical inversion method for the generation of the marginals and importance sampling with carefully selected mean shift we develop an efficient simulation algorithm. Numerical results for a variety of realistic portfolio examples show an impressive performance gain.

Keywords: Risk; management; Importance; sampling; Linear; asset; portfolio; t-Copula; Generalized; hyperbolic; distribution (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:202:y:2010:i:3:p:802-809

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