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Generalized FGM dependence: Geometrical representation and convex bounds on sums

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  • H'el`ene Cossette
  • Etienne Marceau
  • Alessandro Mutti
  • Patrizia Semeraro

Abstract

Building on the one-to-one relationship between generalized FGM copulas and multivariate Bernoulli distributions, we prove that the class of multivariate distributions with generalized FGM copulas is a convex polytope. Therefore, we find sharp bounds in this class for many aggregate risk measures, such as value-at-risk, expected shortfall, and entropic risk measure, by enumerating their values on the extremal points of the convex polytope. This is infeasible in high dimensions. We overcome this limitation by considering the aggregation of identically distributed risks with generalized FGM copula specified by a common parameter $p$. In this case, the analogy with the geometrical structure of the class of Bernoulli distribution allows us to provide sharp analytical bounds for convex risk measures.

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  • H'el`ene Cossette & Etienne Marceau & Alessandro Mutti & Patrizia Semeraro, 2024. "Generalized FGM dependence: Geometrical representation and convex bounds on sums," Papers 2406.10648, arXiv.org.
    • Handle: RePEc:arx:papers:2406.10648
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    References listed on IDEAS

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    1. Roberto Fontana & Elisa Luciano & Patrizia Semeraro, 2021. "Model risk in credit risk," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 176-202, January.
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