Efficient risk simulations for linear asset portfolios in the t-copula model

Halis Sak, Wolfgang Hörmann, Josef Leydold
2010 European Journal of Operational Research  
We consider the problem of calculating tail probabilities of the returns of linear asset portfolios. As a flexible and accurate model for the logarithmic returns we use the t-copula dependence structure and marginals following the generalized hyperbolic distribution. Exact calculation of the tail-loss probabilities is not possible and even simulation leads to challenging numerical problems. Applying a new numerical inversion method for the generation of the marginals and importance sampling
more » ... carefully selected mean shift we develop an efficient simulation algorithm. Numerical results for a variety of realistic portfolio examples show an impressive performance gain.
doi:10.1016/j.ejor.2009.06.025 fatcat:yj4xv5jx5fbrllr5ctreu2rfde