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Copula Based Monte Carlo Integration in Financial Problems

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  • Sancetta, A.

Abstract

A computational technique that transform integrals over RK, or some of its subsets, into the hypercube [0, 1]K can be exploited in order to solve integrals via Monte Carlo integration without the need to simulate from the original distribution; all that is needed is to simulate iid uniform [0, 1] pseudo random variables. In particular the technique arises from the copula representation of multivariate distributions and the use of the marginal quantile function of the data. The procedure is further simplified if the quantile function has closed form. Several financial applications are considered in order to highlight the scope of this numerical technique for financial problems

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0506.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0506.

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Length: 34
Date of creation: Jan 2005
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Handle: RePEc:cam:camdae:0506

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Copula; Martingale; Monte Carlo Integral; Quantile Transform; Utility Function.;

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  1. Knight, J.L. & Stachell, S.E. & Tran, K.C., 1995. "Statistical Modeling of Asymetric Risk in Asset Returns," Papers 95-3, Saskatchewan - Department of Economics.
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  3. John Geweke, 1995. "Monte Carlo simulation and numerical integration," Staff Report 192, Federal Reserve Bank of Minneapolis.
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  7. Fortin, Ines & Kuzmics, Christoph, 2002. "Tail-Dependence in Stock-Return Pairs," Economics Series 126, Institute for Advanced Studies.
  8. Rimas Norvaisa, 2000. "Modelling of stock price changes: A real analysis approach," Finance and Stochastics, Springer, vol. 4(3), pages 343-369.
  9. A. Sancetta & Satchell, S.E., 2001. "Bernstein Approximations to the Copula Function and Portfolio Optimization," Cambridge Working Papers in Economics 0105, Faculty of Economics, University of Cambridge.
  10. Scarsini, Marco, 1989. "Copulae of probability measures on product spaces," Journal of Multivariate Analysis, Elsevier, vol. 31(2), pages 201-219, November.
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