Incorporating views on marginal distributions in the calibration of risk models

Santanu Dey; Sandeep Juneja; Karthyek R. A. Murthy; Karthyek Rajhaa Annaswamy Murthy

doi:10.1016/j.orl.2014.11.004

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Incorporating views on marginal distributions in the calibration of risk models

Journal article

Peer reviewed

Incorporating views on marginal distributions in the calibration of risk models

Santanu Dey, Sandeep Juneja, Karthyek R. A. Murthy and Karthyek Rajhaa Annaswamy Murthy

Operations research letters, Vol.43(1), pp.46-51

01/01/2015

DOI: https://doi.org/10.1016/j.orl.2014.11.004

Abstract

Operations Research & Management Science

Science & Technology

Technology

We apply entropy based ideas to portfolio optimization and options pricing. The known abstracted problem corresponds to finding a probability measure that minimizes relative entropy with respect to a specified measure while satisfying moment constraints on functions of underlying assets. We generalize this to also allow constraints on marginal distribution of functions of underlying assets. These are applied to Markowitz portfolio framework to incorporate fatter tails as well as to options pricing to incorporate implied risk neutral densities on liquid assets. (C) 2014 Elsevier B.V. All rights reserved.

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Title: Incorporating views on marginal distributions in the calibration of risk models
Creators - without role: Santanu Dey - Tata Institute of Fundamental Research
Sandeep Juneja - Tata Institute of Fundamental Research
Karthyek R. A. Murthy - Tata Institute of Fundamental Research
Karthyek Rajhaa Annaswamy Murthy - ESD Pillar
Publication Details: Operations research letters, Vol.43(1), pp.46-51
Publisher: Elsevier
Number of pages: 6
Identifiers: 9911732809846
Academic Unit: ESD Pillar
Language: English
Resource Type: Journal article

Incorporating views on marginal distributions in the calibration of risk models

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