Efficient estimation of large portfolio loss probabilities in t-copula models

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dc.contributor.authorChan, Chi Chun (Joshua)
dc.contributor.authorKroese, Dirk
dc.date.accessioned2015-12-08T22:23:34Z
dc.date.issued2010
dc.date.updated2016-02-24T12:00:53Z
dc.description.abstractWe consider the problem of accurately measuring the credit risk of a portfolio consisting of loans, bonds and other financial assets. One particular performance measure of interest is the probability of large portfolio losses over a fixed time horizon. We revisit the so-called t-copula that generalizes the popular normal copula to allow for extremal dependence among defaults. By utilizing the asymptotic description of how the rare event occurs, we derive two simple simulation algorithms based on conditional Monte Carlo to estimate the probability that the portfolio incurs large losses under the t-copula. We further show that the less efficient estimator exhibits bounded relative error. An extensive simulation study demonstrates that both estimators outperform existing algorithms. We then discuss a generalization of the t-copula model that allows the multivariate defaults to have an asymmetric distribution. Lastly, we show how the estimators proposed for the t-copula can be modified to estimate the portfolio risk under the skew t-copula model.
dc.identifier.issn0377-2217
dc.identifier.urihttp://hdl.handle.net/1885/32919
dc.publisherElsevier
dc.sourceEuropean Journal of Operational Research
dc.subjectKeywords: Conditional Monte Carlo; Credit risks; Cross-entropy method; MONTE CARLO; Rare event simulation; Estimation; Monte Carlo methods; Probability; Risk assessment; Risk perception Conditional Monte Carlo; Copula models; Credit risk; Cross-entropy method; Rare-event simulation
dc.titleEfficient estimation of large portfolio loss probabilities in t-copula models
dc.typeJournal article
local.bibliographicCitation.lastpage367
local.bibliographicCitation.startpage361
local.contributor.affiliationChan, Chi Chun (Joshua), College of Business and Economics, ANU
local.contributor.affiliationKroese, Dirk, University of Queensland
local.contributor.authoremailu4935553@anu.edu.au
local.contributor.authoruidChan, Chi Chun (Joshua), u4935553
local.description.embargo2037-12-31
local.description.notesImported from ARIES
local.identifier.absfor140302 - Econometric and Statistical Methods
local.identifier.absseo970114 - Expanding Knowledge in Economics
local.identifier.ariespublicationU9501697xPUB96
local.identifier.citationvolume205
local.identifier.doi10.1016/j.ejor.2010.01.003
local.identifier.scopusID2-s2.0-76949106058
local.identifier.thomsonID000276030200014
local.identifier.uidSubmittedByU9501697
local.type.statusPublished Version

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