Approximate uncertainty modeling in risk analysis with vine copulas

Bedford, Tim and Daneshkhah, Alireza and Wilson, Kevin J. (2016) Approximate uncertainty modeling in risk analysis with vine copulas. Risk Analysis, 36 (4). pp. 792-815. ISSN 0272-4332

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    Abstract

    Many applications of risk analysis require us to jointly model multiple uncertain quantities. Bayesian networks and copulas are two common approaches to modelling joint uncertainties with probability distributions. This paper focuses on new methodologies for copulas by developing work of Cooke, Bedford, Kurowica and others on vines as a way of constructing higher dimensional distributions which do not suffer from some of the restrictions of alternatives such as the multivariate Gaussian copula. The paper provides a fundamental approximation result, demonstrating that we can approximate any density as closely as we like using vines. It further operationalizes this result by showing how minimum information copulas can be used to provide parametric classes of copulas which have such good levels of approximation. We extend previous approaches using vines by considering non-constant conditional dependencies which are particularly relevant in financial risk modelling. We discuss how such models may be quantified, in terms of expert judgement or by fitting data, and illustrate the approach by modelling two financial datasets.

    ORCID iDs

    Bedford, Tim ORCID logoORCID: https://orcid.org/0000-0002-3545-2088, Daneshkhah, Alireza and Wilson, Kevin J.;
    • Item type:Article
      ID code:54053
      Dates:
      Date
      Event
      30 April 2016
      Published
      2 September 2015
      Published Online
      15 July 2015
      Accepted
      Keywords:risk analysis, risk modelling, Bayesian networks, copula, entropy, vines, Risk Management, Physiology (medical), Safety, Risk, Reliability and Quality
      Subjects:Social Sciences > Industries. Land use. Labor > Risk Management
      Department:Strathclyde Business School > Management Science
      Depositing user: Pure Administrator
      Date deposited:24 Aug 2015 15:46
      Last modified:11 Sep 2021 02:22
      Related URLs:
      URI:https://strathprints.strath.ac.uk/id/eprint/54053
    CORE (COnnecting REpositories)