Sequential Monte Carlo Samplers for capital allocation under copula-dependent risk models

Rodrigo Targino, Gareth W. Peters and Pavel V. Shevchenko

Insurance: Mathematics and Economics, 2015, vol. 61, issue C, 206-226

Abstract: In this paper we assume a multivariate risk model has been developed for a portfolio and its capital derived as a homogeneous risk measure. The Euler (or gradient) principle, then, states that the capital to be allocated to each component of the portfolio has to be calculated as an expectation conditional to a rare event, which can be challenging to evaluate in practice. We exploit the copula-dependence within the portfolio risks to design a Sequential Monte Carlo Samplers based estimate to the marginal conditional expectations involved in the problem, showing its efficiency through a series of computational examples.

Keywords: Risk management; Capital allocation; Sequential Monte Carlo (SMC); Copula models; Euler allocation (search for similar items in EconPapers)
JEL-codes: C15 G21 G22 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (17)

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Working Paper: Sequential Monte Carlo Samplers for capital allocation under copula-dependent risk models (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:61:y:2015:i:c:p:206-226

DOI: 10.1016/j.insmatheco.2015.01.007

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