Risk aggregation with empirical margins: Latin hypercubes, empirical copulas, and convergence of sum distributions

Georg Mainik

Journal of Multivariate Analysis, 2015, vol. 141, issue C, 197-216

Abstract: This paper studies convergence properties of multivariate distributions constructed by endowing empirical margins with a copula. This setting includes Latin Hypercube Sampling with dependence, also known as the Iman–Conover method. The primary question addressed here is the convergence of the component sum, which is relevant to risk aggregation in insurance and finance. This paper shows that a CLT for the aggregated risk distribution is not available, so that the underlying mathematical problem goes beyond classic functional CLTs for empirical copulas. This issue is relevant to Monte-Carlo based risk aggregation in all multivariate models generated by plugging empirical margins into a copula. Instead of a functional CLT, this paper establishes strong uniform consistency of the estimated sum distribution function and provides a sufficient criterion for the convergence rate O(n−1/2) in probability. These convergence results hold for all copulas with bounded densities. Examples with unbounded densities include bivariate Clayton and Gauss copulas. The convergence results are not specific to the component sum and hold also for any other componentwise non-decreasing aggregation function. On the other hand, convergence of estimates for the joint distribution is much easier to prove, including CLTs. Beyond Iman–Conover estimates, the results of this paper apply to multivariate distributions obtained by plugging empirical margins into an exact copula or by plugging exact margins into an empirical copula.

Keywords: Risk aggregation; Sum distribution; Empirical margins; Empirical copula; Functional CLT; Iman–Conover; Latin hypercube sampling (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0047259X15001682
Full text for ScienceDirect subscribers only

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:eee:jmvana:v:141:y:2015:i:c:p:197-216

Ordering information: This journal article can be ordered from
http://www.elsevier.com/wps/find/supportfaq.cws_home/regional
https://shop.elsevie ... _01_ooc_1&version=01

DOI: 10.1016/j.jmva.2015.07.008

Access Statistics for this article

Journal of Multivariate Analysis is currently edited by de Leeuw, J.

More articles in Journal of Multivariate Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().