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Utility‐based shortfall risk: Efficient computations via Monte Carlo

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  • Zhaolin Hu
  • Dali Zhang

Abstract

With the development of financial risk management, the notion of convex risk measures has been proposed and has gained increasing attentions. Utility‐based shortfall risk (SR), as a specific and important class of convex risk measures, has become popular in recent years. In this paper we focus on the computational aspects of SR, which are significantly understudied but fundamental for risk assessment and management. We discuss efficient estimation, optimization, and sensitivity analysis of SR, based on Monte Carlo techniques and stochastic optimization methods. We also conduct extensive numerical studies on the proposed approaches. The numerical results further demonstrate the effectiveness of these approaches.

Suggested Citation

  • Zhaolin Hu & Dali Zhang, 2018. "Utility‐based shortfall risk: Efficient computations via Monte Carlo," Naval Research Logistics (NRL), John Wiley & Sons, vol. 65(5), pages 378-392, August.
    • Handle: RePEc:wly:navres:v:65:y:2018:i:5:p:378-392
    DOI: 10.1002/nav.21814
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