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Conditionalization of Copula-Based Models

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  • Dorota Kurowicka

    (Delft Institute of Applied Mathematics, Delft University of Technology, 2628 CD Delft, The Netherlands)

Abstract

Copula models are becoming increasingly popular in engineering and financial applications. They provide a flexible way of constructing joint distributions with arbitrary one-dimensional margins and a wide variety of dependence structures. This paper studies different types of conditionalization of copula-based models. We conditionalize these models in the usual way on point values but also propose a different type of conditionalization on a new margin. This new type of conditionalization is motivated by experience with a model built for application in modeling risk in civil aviation. Changing one margin in a copula model is very easy; however, it is not equivalent to conditionalizing on a new margin. For this purpose, the technique presented by Holland and Wang [Holland PW, Wang YJ (1987) Dependence function for continuous bivariate densities. Commun. Statist. Theory Methods 16(3):867--876], called marginal replacement, is used. The main result of this paper allows a simplified way of conditionalizing on more than one univariate margin in a normal copula model.

Suggested Citation

  • Dorota Kurowicka, 2012. "Conditionalization of Copula-Based Models," Decision Analysis, INFORMS, vol. 9(3), pages 219-230, September.
    • Handle: RePEc:inm:ordeca:v:9:y:2012:i:3:p:219-230
    DOI: 10.1287/deca.1120.0243
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    References listed on IDEAS

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    1. Ale, B.J.M. & Bellamy, L.J. & van der Boom, R. & Cooper, J. & Cooke, R.M. & Goossens, L.H.J. & Hale, A.R. & Kurowicka, D. & Morales, O. & Roelen, A.L.C. & Spouge, J., 2009. "Further development of a Causal model for Air Transport Safety (CATS): Building the mathematical heart," Reliability Engineering and System Safety, Elsevier, vol. 94(9), pages 1433-1441.
    2. Ale, B.J.M. & Bellamy, L.J. & Cooper, J. & Ababei, D. & Kurowicka, D. & Morales, O. & Spouge, J., 2010. "Analysis of the crash of TK 1951 using CATS," Reliability Engineering and System Safety, Elsevier, vol. 95(5), pages 469-477.
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    Cited by:

    1. L. Robin Keller & Ali Abbas & J. Eric Bickel & Vicki M. Bier & David V. Budescu & John C. Butler & Enrico Diecidue & Robin L. Dillon-Merrill & Raimo P. Hämäläinen & Kenneth C. Lichtendahl & Jason R. W, 2012. "From the Editors ---Brainstorming, Multiplicative Utilities, Partial Information on Probabilities or Outcomes, and Regulatory Focus," Decision Analysis, INFORMS, vol. 9(4), pages 297-302, December.
    2. L. Robin Keller & Kelly M. Kophazi, 2012. "From the Editors ---Copulas, Group Preferences, Multilevel Defenders, Sharing Rewards, and Communicating Analytics," Decision Analysis, INFORMS, vol. 9(3), pages 213-218, September.

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