On Design of Representative Distributionally Robust Formulations for Evaluation of Tail Risk Measures

Anand Deo

Papers from arXiv.org

Abstract: Conditional Value-at-Risk (CVaR) is a risk measure widely used to quantify the impact of extreme losses. Owing to the lack of representative samples CVaR is sensitive to the tails of the underlying distribution. In order to combat this sensitivity, Distributionally Robust Optimization (DRO), which evaluates the worst-case CVaR measure over a set of plausible data distributions is often deployed. Unfortunately, an improper choice of the DRO formulation can lead to a severe underestimation of tail risk. This paper aims at leveraging extreme value theory to arrive at a DRO formulation which leads to representative worst-case CVaR evaluations in that the above pitfall is avoided while simultaneously, the worst case evaluation is not a gross over-estimate of the true CVaR. We demonstrate theoretically that even when there is paucity of samples in the tail of the distribution, our formulation is readily implementable from data, only requiring calibration of a single scalar parameter. We showcase that our formulation can be easily extended to provide robustness to tail risk in multivariate applications as well as in the evaluation of other commonly used risk measures. Numerical illustrations on synthetic and real-world data showcase the practical utility of our approach.

Date: 2025-06
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2506.16230 Latest version (application/pdf)

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:arx:papers:2506.16230

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().