Comparing Approximations for Risk Measures of Sums of Nonindependent Lognormal Random Variables

Steven Vanduffel (), Tom Hoedemakers and Jan Dhaene

North American Actuarial Journal, 2005, vol. 9, issue 4, 71-82

Abstract: In this paper we consider different approximations for computing the distribution function or risk measures related to a discrete sum of nonindependent lognormal random variables. Comonotonic upper and lower bound approximations for such sums have been proposed in Dhaene et al. (2002a,b). We introduce the comonotonic “maximal variance” lower bound approximation. We also compare the comonotonic approximations with two well-known moment-matching approximations: the lognormal and the reciprocal Gamma approximations. We find that for a wide range of parameter values the comonotonic “maximal variance” lower bound approximation outperforms the other approximations.

Date: 2005
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DOI: 10.1080/10920277.2005.10596226

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