Measuring Portfolio Risk Under Partial Dependence Information
39 Pages Posted: 9 Mar 2014 Last revised: 2 Nov 2017
Date Written: June 16, 2016
The bounds for risk measures of a portfolio when its components have known marginal distributions but the dependence among the risks is unknown are often too wide to be useful in practice. Moreover, availability of additional dependence information, such as knowledge of some higher-order moments, makes the problem significantly more difficult. We show that replacing knowledge of the marginal distributions with knowledge of the mean of the portfolio does not result in significant loss of information when estimating bounds on Value-at-Risk. These results are used to assess the margin by which total capital can be underestimated when using the Solvency II or RBC capital aggregation formulas.
Keywords: Stochastic dominance, Moment space, s-convex order, Value-at-Risk
JEL Classification: C60
Suggested Citation: Suggested Citation