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Sklar’s theorem, copula products, and ordering results in factor models

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  • Ansari Jonathan

    (Department of Quantitative Finance, University of Freiburg, Germany)

  • Rüschendorf Ludger

    (Department of Mathematical Stochastics, University of Freiburg, Germany)

Abstract

We consider a completely specified factor model for a risk vector X = (X1, . . ., Xd), where the joint distributions of the components of X with a risk factor Z and the conditional distributions of X given Z are specified. We extend the notion of *-product of d-copulas as introduced for d = 2 and continuous factor distribution in Darsow et al. [6] and Durante et al. [8] to the multivariate and discontinuous case. We give a Sklar-type representation theorem for factor models showing that these *-products determine the copula of a completely specified factor model. We investigate in detail approximation, transformation, and ordering properties of *-products and, based on them, derive general orthant ordering results for completely specified factor models in dependence on their specifications. The paper generalizes previously known ordering results for the worst case partially specified risk factor models to some general classes of positive or negative dependent risk factor models. In particular, it develops some tools to derive sharp worst case dependence bounds in subclasses of completely specified factor models.

Suggested Citation

  • Ansari Jonathan & Rüschendorf Ludger, 2021. "Sklar’s theorem, copula products, and ordering results in factor models," Dependence Modeling, De Gruyter, vol. 9(1), pages 267-306, January.
    • Handle: RePEc:vrs:demode:v:9:y:2021:i:1:p:267-306:n:3
    DOI: 10.1515/demo-2021-0113
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    References listed on IDEAS

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    1. Müller, Alfred & Scarsini, Marco, 2005. "Archimedean copulæ and positive dependence," Journal of Multivariate Analysis, Elsevier, vol. 93(2), pages 434-445, April.
    2. Alfred Müller & Marco Scarsini, 2001. "Stochastic Comparison of Random Vectors with a Common Copula," Mathematics of Operations Research, INFORMS, vol. 26(4), pages 723-740, November.
    3. Carole Bernard & Ludger Rüschendorf & Steven Vanduffel & Ruodu Wang, 2017. "Risk bounds for factor models," Finance and Stochastics, Springer, vol. 21(3), pages 631-659, July.
    4. Piotr Mikusiński & Michael Taylor, 2010. "Some approximations of n-copulas," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 72(3), pages 385-414, November.
    5. Krupskii, Pavel & Joe, Harry, 2013. "Factor copula models for multivariate data," Journal of Multivariate Analysis, Elsevier, vol. 120(C), pages 85-101.
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    Cited by:

    1. Jonathan Ansari & Eva Lutkebohmert & Ariel Neufeld & Julian Sester, 2022. "Improved Robust Price Bounds for Multi-Asset Derivatives under Market-Implied Dependence Information," Papers 2204.01071, arXiv.org, revised Sep 2023.

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