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Modeling Portfolio Loss by Interval Distributions

Author

Listed:
  • Yang, Bill Huajian
  • Yang, Jenny
  • Yang, Haoji

Abstract

Models for a continuous risk outcome has a wide application in portfolio risk management and capital allocation. We introduce a family of interval distributions based on variable transformations. Densities for these distributions are provided. Models with a random effect, targeting a continuous risk outcome, can then be fitted by maximum likelihood approaches assuming an interval distribution. Given fixed effects, regression function can be estimated and derived accordingly when required. This provides an alternative regression tool to the fraction response model and Beta regression model.

Suggested Citation

  • Yang, Bill Huajian & Yang, Jenny & Yang, Haoji, 2020. "Modeling Portfolio Loss by Interval Distributions," MPRA Paper 102219, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102219
    as

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    File URL: https://mpra.ub.uni-muenchen.de/102219/1/MPRA_paper_102219.pdf
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    References listed on IDEAS

    as
    1. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Theory," Econometrica, Econometric Society, vol. 52(3), pages 681-700, May.
    2. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
    3. Ramponi, Federico Alessandro & Campi, Marco C., 2018. "Expected shortfall: Heuristics and certificates," European Journal of Operational Research, Elsevier, vol. 267(3), pages 1003-1013.
    4. Yang, Bill Huajian, 2013. "Estimating Long-Run PD, Asset Correlation, and Portfolio Level PD by Vasicek Models," MPRA Paper 57244, University Library of Munich, Germany.
    5. Rosen, Dan & Saunders, David, 2009. "Analytical methods for hedging systematic credit risk with linear factor portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 37-52, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Interval distribution; model with a random effect; tailed index; expected shortfall; heteroscedasticity; Beta regression model; fraction response model; maximum likelihood.;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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