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Bounds on Capital Requirements For Bivariate Risk with Given Marginals and Partial Information on the Dependence

Author

Listed:
  • Bernard Carole

    (Department of Statistics and Actuarial Science at the University of Waterloo)

  • Liu Yuntao

    (University of California)

  • MacGillivray Niall

    (University of Waterloo)

  • Zhang Jinyuan

    (University of British Columbia)

Abstract

Nelsen et al. [20] find bounds for bivariate distribution functions when there are constraints on the values of its quartiles. Tankov [25] generalizes this work by giving explicit expressions for the best upper and lower bounds for a bivariate copula when its values on a compact subset of [0; 1]2 are known. He shows that they are quasi-copulas and not necessarily copulas. Tankov [25] and Bernard et al. [3] both give sufficient conditions for these bounds to be copulas. In this note we give weaker sufficient conditions to ensure that both bounds are simultaneously copulas. Furthermore, we develop a novel application to quantitative risk management by computing bounds on a bivariate risk measure. This can be useful in optimal portfolio selection, in reinsurance, in pricing bivariate derivatives or in determining capital requirements when only partial information on dependence is available.

Suggested Citation

  • Bernard Carole & Liu Yuntao & MacGillivray Niall & Zhang Jinyuan, 2013. "Bounds on Capital Requirements For Bivariate Risk with Given Marginals and Partial Information on the Dependence," Dependence Modeling, De Gruyter, vol. 1(2013), pages 37-53, October.
    • Handle: RePEc:vrs:demode:v:1:y:2013:i::p:37-53:n:2
    DOI: 10.2478/demo-2013-0002
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    References listed on IDEAS

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    1. Phelim Boyle & Weidong Tian, 2007. "Portfolio Management With Constraints," Mathematical Finance, Wiley Blackwell, vol. 17(3), pages 319-343, July.
    2. Genest, C. & Quesada Molina, J. J. & Rodriguez Lallena, J. A. & Sempi, C., 1999. "A Characterization of Quasi-copulas," Journal of Multivariate Analysis, Elsevier, vol. 69(2), pages 193-205, May.
    3. Carole Bernard & Phelim P. Boyle & Steven Vanduffel, 2014. "Explicit Representation of Cost-Efficient Strategies," Finance, Presses universitaires de Grenoble, vol. 35(2), pages 5-55.
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    Cited by:

    1. Bernard, Carole & Jiang, Xiao & Wang, Ruodu, 2014. "Risk aggregation with dependence uncertainty," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 93-108.

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