Capital allocation for portfolios with non-linear risk aggregation

Existing risk capital allocation methods, such as the Euler rule, work under the explicit assumption that portfolios are formed as linear combinations of random loss/profit variables, with the firm being able to choose the portfolio weights. This assumption is unrealistic in an insurance context, where arbitrary scaling of risks is generally not possible. Here, we model risks as being partially generated by Lévy processes, capturing the non-linear aggregation of risk. The model leads to non-homogeneous fuzzy games, for which the Euler rule is not applicable. For such games, we seek capital allocations that are in the core, that is, do not provide incentives for splitting portfolios. We show that the Euler rule of an auxiliary linearised fuzzy game (non-uniquely) satisfies the core property and, thus, provides a plausible and easily implemented capital allocation. In contrast, the Aumann–Shapley allocation does not generally belong to the core. For the non-homogeneous fuzzy games studied, Tasche’s (1999) criterion of suitability for performance measurement is adapted and it is shown that the proposed allocation method gives appropriate signals for improving the portfolio underwriting profit.     

Haezendonck–Goovaerts risk measure with a heavy tailed loss

Recently Haezendonck–Goovaerts (H–G) risk measure has received much attention in (re)insurance and portfolio management. Some nonparametric inferences have been proposed in the literature. When the loss variable does not have enough moments, which depends on the involved Young function, the nonparametric estimator in Ahn and Shyamalkumar (2014) has a nonnormal limit, which challenges interval estimation. Motivated by the fact that many loss variables in insurance and finance could have a heavier tail such as an infinite variance, this paper proposes a new estimator which estimates the tail by extreme value theory and the middle part nonparametrically. It turns out that the proposed new estimator always has a normal limit regardless of the tail heaviness of the loss variable. Hence an interval with asymptotically correct confidence level can be obtained easily either by the normal approximation method via estimating the asymptotic variance or by a bootstrap method. A simulation study and real data analysis confirm the effectiveness of the proposed new inference procedure for estimating the H–G risk measure.     

Hierarchical Archimedean copulas through multivariate compound distributions

In this paper, we propose a new hierarchical Archimedean copula construction based on multivariate compound distributions. This new imbrication technique is derived via the construction of a multivariate exponential mixture distribution through compounding. The absence of nesting and marginal conditions, contrarily to the nested Archimedean copulas approach, leads to major advantages, such as a flexible range of possible combinations in the choice of distributions, the existence of explicit formulas for the distribution of the sum, and computational ease in high dimensions. A balance between flexibility and parsimony is targeted. After presenting the construction technique, properties of the proposed copulas are investigated and illustrative examples are given. A detailed comparison with other construction methodologies of hierarchical Archimedean copulas is provided. Risk aggregation under this newly proposed dependence structure is also examined.     

Unit-linked life insurance policies: Optimal hedging in partially observable market models

In this paper we investigate the hedging problem of a unit-linked life insurance contract via the local risk-minimization approach, when the insurer has a restricted information on the market. In particular, we consider an endowment insurance contract, that is a combination of a term insurance policy and a pure endowment, whose final value depends on the trend of a stock market where the premia the policyholder pays are invested. To allow for mutual dependence between the financial and the insurance markets, we use the progressive enlargement of filtration approach. We assume that the stock price process dynamics depends on an exogenous unobservable stochastic factor that also influences the mortality rate of the policyholder. We characterize the optimal hedging strategy in terms of the integrand in the Galtchouk–Kunita–Watanabe decomposition of the insurance claim with respect to the minimal martingale measure and the available information flow. We provide an explicit formula by means of predictable projection of the corresponding hedging strategy under full information with respect to the natural filtration of the risky asset price and the minimal martingale measure. Finally, we discuss applications in a Markovian setting via filtering.     

Geometric approach to global asymptotic stability for the SEIRS models in epidemiology

In this paper, we present a more general criterion for the global asymptotic stability of equilibria for nonlinear autonomous differential equations based on the geometric criterion developed by Li and Muldowney. By applying this criterion, we obtain some results for the global asymptotic stability of SEIRS models with constant recruitment and varying total population size. Based on these results, we give a complete affirmative answer to Liu–Hethcote–Levin conjecture. Furthermore, an affirmative answer to Li–Graef–Wang–Karsai’s problem for SEIR model with permanent immunity and varying total population size is given.     

Proximal-gradient algorithms for fractional programming

In this paper, we propose two proximal-gradient algorithms for fractional programming problems in real Hilbert spaces, where the numerator is a proper, convex and lower semicontinuous function and the denominator is a smooth function, either concave or convex. In the iterative schemes, we perform a proximal step with respect to the nonsmooth numerator and a gradient step with respect to the smooth denominator. The algorithm in case of a concave denominator has the particularity that it generates sequences which approach both the (global) optimal solutions set and the optimal objective value of the underlying fractional programming problem. In case of a convex denominator the numerical scheme approaches the set of critical points of the objective function, provided the latter satisfies the Kurdyka-?ojasiewicz property.