On the Use of Copulas for Calculating the Present Value of a General Cash Flow
AbstractIn a paper of 2000, Kaas, Dhaene and Goovaerts investigate the present value of a rather general cash flow as a special case of sums of dependent risks. Making use of comonotonic risks, they derive upper and lower bounds for the distribution of the present value, in the sense of convex ordering. These bounds are very close to the real distribution in case all payments have the same sign; however, if there are both positive and negative payments, the upper bounds perform rather badly. In the present contribution we show what happens when solving this problem by means of copulas. The idea consists of splitting up the total present value in the difference of two present values with positive payments. Making use of a copula as an approximation for the joint distribution of the two sums, an approximation for the distribution of the original present value can be derived.
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Bibliographic InfoArticle provided by Katholieke Universiteit Leuven, Faculteit Economie en Bedrijfswetenschappen in its journal Review of Business and Economics.
Volume (Year): L (2005)
Issue (Month): 1 ()
cash flow; present value; convex order; copula; distribution;
Other versions of this item:
- Goovaerts, Marc & De Schepper, A & Hua, Y & Darkiewicz, Grzegorz & Vyncke, David, 2005. "On the use of copula for calculating the present value of a general cash flow," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/120756, Katholieke Universiteit Leuven.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kaas, R & Dhaene, Jan & Goovaerts, Marc, 2000.
"Upper and lower bounds for sums of random variables,"
Open Access publications from Katholieke Universiteit Leuven
urn:hdl:123456789/223713, Katholieke Universiteit Leuven.
- Kaas, Rob & Dhaene, Jan & Goovaerts, Marc J., 2000. "Upper and lower bounds for sums of random variables," Insurance: Mathematics and Economics, Elsevier, vol. 27(2), pages 151-168, October.
- Kaas, Robert & Dhaene, Jan & Goovaerts, Marc, 2000. "Upper and lower bounds for sums of random variables," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/101165, Katholieke Universiteit Leuven.
- Goovaerts, Marc & Dhaene, Jan & De Schepper, A, 1999. "Stochastic upper bounds for present value functions," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/118656, Katholieke Universiteit Leuven.
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