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Multiple risk factor dependence structures: Distributional properties

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  • Su, Jianxi
  • Furman, Edward

Abstract

We introduce a class of dependence structures that we call the Multiple Risk Factor (MRF) dependence structures. On the one hand, the new constructions establish a factor model framework for analysing default risk within a risk portfolio in which the components are exposed to an arbitrary number of risk factors having dependent occurrence times. On the other hand, the MRF structures can be seen as an encompassing family of multivariate probability distributions with the univariate margins distributed Pareto of the 2nd kind, and in this role, they can be used to model dependent and heavy tailed insurance losses. In both cases, the MRF dependences provide a transparent and technically convenient basis for measuring and managing interdependent risks in the presence of predetermined sets of background risk factors that are of interest to risk managers.

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  • Su, Jianxi & Furman, Edward, 2017. "Multiple risk factor dependence structures: Distributional properties," Insurance: Mathematics and Economics, Elsevier, vol. 76(C), pages 56-68.
    • Handle: RePEc:eee:insuma:v:76:y:2017:i:c:p:56-68
    DOI: 10.1016/j.insmatheco.2017.06.006
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    2. J. C. Arismendi-Zambrano & Vladimir Belitsky & Vinicius Amorim Sobreiro & Herbert Kimura, 2020. "The Implications of Tail Dependency Measures for Counterparty Credit Risk Pricing," Economics Department Working Paper Series n306-20.pdf, Department of Economics, National University of Ireland - Maynooth.
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    5. Furman, Edward & Kye, Yisub & Su, Jianxi, 2021. "Multiplicative background risk models: Setting a course for the idiosyncratic risk factors distributed phase-type," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 153-167.
    6. Yu, L. & Xiao, Y. & Jiang, S. & Li, Y.P. & Fan, Y.R. & Huang, G.H. & Lv, J. & Zuo, Q.T. & Wang, F.Q., 2020. "A copula-based fuzzy interval-random programming approach for planning water-energy nexus system under uncertainty," Energy, Elsevier, vol. 196(C).
    7. Nadezhda Gribkova & Ričardas Zitikis, 2019. "Statistical detection and classification of background risks affecting inputs and outputs," METRON, Springer;Sapienza Università di Roma, vol. 77(1), pages 1-18, April.
    8. Kiriliouk, Anna, 2020. "Hypothesis testing for tail dependence parameters on the boundary of the parameter space," Econometrics and Statistics, Elsevier, vol. 16(C), pages 121-135.

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    More about this item

    Keywords

    Multivariate distributions; Dependence; Pareto distributions; Default risk; Factor model; Weighted risk measures;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions

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