On the distribution of sums of random variables with copula-induced dependence

Irène Gijbels and Klaus Herrmann

Insurance: Mathematics and Economics, 2014, vol. 59, issue C, 27-44

Abstract: We investigate distributional properties of the sum of d possibly unbounded random variables. The joint distribution of the random vector is formulated by means of an absolutely continuous copula, allowing for a variety of different dependence structures between the summands. The obtained expression for the distribution of the sum features a separation property into marginal and dependence structure contributions typical for copula approaches. Along the same lines we obtain the formulation of a conditional expectation closely related to the expected shortfall common in actuarial and financial literature. We further exploit the separation to introduce new numerical algorithms to compute the distribution and quantile function, as well as this conditional expectation. A comparison with the most common competitors shows that the discussed Path Integration algorithm is the most suitable method for computing these quantities. In our example, we apply the theory to compute Value-at-Risk forecasts for a trivariate portfolio of index returns.

Keywords: (G)AEP algorithm; Aggregation of risk; Copula; Dependence; Expected shortfall; Path integration; Sums of random variables; Value-at-risk (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:59:y:2014:i:c:p:27-44

DOI: 10.1016/j.insmatheco.2014.08.002

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