Hierarchical Archimedean Dependence in Common Shock Models

Umberto Cherubini () and Sabrina Mulinacci
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Umberto Cherubini: University of Bologna

Methodology and Computing in Applied Probability, 2021, vol. 23, issue 1, 143-163

Abstract: Abstract In this paper we show how to extend a simple common shock model with Archimedean dependence of the hidden variables to the non-exchangeable case. The assumption is that the hidden risk factors are linked by a hierarchical Archimedean dependence structure, possibly fully nested. We give directions about how to implement the model and to address the issue that the hidden variables must be put in descending dependence order. We show how the model can be simplified in the Gumbel-Marshall-Olkin distribution in Cherubini and Mulinacci (2017), the only case in which exponential distribution of the observed variables is preserved.

Keywords: Common shock models; Marshall-Olkin distribution; Hierarchical Archimedean copulas; Systemic risk; 60E99; 62H20 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11009-020-09816-8

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