Probabilistic Modeling of Financial Uncertainties

Alireza Daneshkhah, Amin Hosseinian-Far, Omid Chatrabgoun, Tabassom Sedighi, Maryam Farsi

Research output: Contribution to conferencePaper

Abstract

Since the global financial crash, one of the main trends in the financial engineering discipline has been to enhance the efficiency and flexibility of financial probabilistic risk assessments. Creditors could immensely benefit from such improvements in analysis hoping to minimise potential monetary losses. Analysis of real world financial scenarios require modeling of multiple uncertain quantities with a view to present more accurate, near future probabilistic predictions. Such predictions are essential for an informed decision making. In this article, the authors extend Bayesian Networks Pair-Copula Construction (BN-PCC) further using the minimum information vine model which results in a more flexible and efficient approach in modeling multivariate dependencies of heavy-tailed distribution and tail dependence as observed in the financial data. The authors demonstrate that the extended model based on minimum information Pair-Copula Construction (PCC) can approximate any non-Gaussian BN to any degree of approximation. The proposed method has been applied to the portfolio data derived from a Brazilian case study. The results show that the fitting of the multivariate distribution approximated using the proposed model has been improved compared to other previously published approaches.
Original languageEnglish
Number of pages11
DOIs
Publication statusPublished - 2018

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Copula
Modeling
Uncertainty
Prediction
Risk assessment
Decision making
Information model
Approximation
Financial data
Multivariate distribution
Scenarios
Crash
Heavy-tailed distribution
Tail dependence
Bayesian networks
Financial engineering

Cite this

Daneshkhah, A., Hosseinian-Far, A., Chatrabgoun, O., Sedighi, T., & Farsi, M. (2018). Probabilistic Modeling of Financial Uncertainties. https://doi.org/10.4018/IJOCI.2018040101

Probabilistic Modeling of Financial Uncertainties. / Daneshkhah, Alireza; Hosseinian-Far, Amin ; Chatrabgoun, Omid; Sedighi, Tabassom; Farsi, Maryam.

2018.

Research output: Contribution to conferencePaper

Daneshkhah, A, Hosseinian-Far, A, Chatrabgoun, O, Sedighi, T & Farsi, M 2018, 'Probabilistic Modeling of Financial Uncertainties'. https://doi.org/10.4018/IJOCI.2018040101
Daneshkhah, Alireza ; Hosseinian-Far, Amin ; Chatrabgoun, Omid ; Sedighi, Tabassom ; Farsi, Maryam. / Probabilistic Modeling of Financial Uncertainties. 11 p.
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