Abstract
We investigate the problem of finding upper and lower bounds for a Choquet risk measure of a nonlinear function of two risk factors, when the marginal distributions of the risk factors are ambiguous and represented by nonadditive measures on the marginal spaces and the joint nonadditive distribution on the product space is unknown. We treat this problem as a generalization of the optimal transport problem to the setting of nonadditive measures. We provide explicit characterizations of the optimal solutions for finite marginal spaces, and we investigate some of their properties. We further discuss the connections with linear programming, showing that the optimal transport problems for capacities are linear programs, and we also characterize their duals explicitly. Finally, we investigate a series of numerical examples, including a comparison with the classical optimal transport problem, and applications to counterparty credit risk.
Funding source: Natural Sciences and Engineering Research Council of Canada
Award Identifier / Grant number: 2018-03961
Award Identifier / Grant number: 2017-04220
Funding statement: Mario Ghossoub and David Saunders acknowledge financial support from the Natural Sciences and Engineering Research Council of Canada in the form of Discovery Grants (NSERC Grant Nos. 2018-03961 and 2017-04220, respectively).
References
[1] C. Acerbi, Spectral measures of risk: A coherent representation of subjective risk aversion, J. Bank. Finance 26 (2002), no. 7, 1505–1518. 10.1016/S0378-4266(02)00281-9Search in Google Scholar
[2] P. Artzner, F. Delbaen, J.-M. Eber and D. Heath, Coherent measures of risk, Math. Finance 9 (1999), no. 3, 203–228. 10.1111/1467-9965.00068Search in Google Scholar
[3] C. Bauer, Products of non-additive measures: A Fubini-like theorem, Theory Decision 73 (2012), no. 4, 621–647. 10.1007/s11238-012-9324-5Search in Google Scholar
[4] D. Brigo, M. Morini and A. Pallavicini, Counterparty Credit Risk, Collateral and Funding: With Pricing Cases for all Asset Classes, Wiley, Hoboken, 2013. 10.1002/9781118818589Search in Google Scholar
[5] G. Carlier and K. S. Zhang, Existence of solutions to principal-agent problems with adverse selection under minimal assumptions, J. Math. Econom. 88 (2020), 64–71. 10.1016/j.jmateco.2020.03.002Search in Google Scholar
[6] Z. Chen, H. Hu and J. Jiang, Convergence analysis on data-driven fortet-mourier metrics with applications in stochastic optimization, Sustainability 14 (2022), no. 8, Article ID 4501. 10.3390/su14084501Search in Google Scholar
[7] I. Gilboa, Uncertainty in Economic Theory: Essays in Honor of David Schmeidler’s 65th Birthday, Routledge Frontiers of Political Economy 63, Routledge, London, 2004. Search in Google Scholar
[8] F. Delbaen, Coherent risk measures on general probability spaces, Advances in Finance and Stochastics, Springer, Berlin (2002), 1–37. 10.1007/978-3-662-04790-3_1Search in Google Scholar
[9] D. Denneberg, Non-Additive Measure and Integral, Theory Decision Libr. Ser B. Math. Stat. Methods 27, Kluwer Academic, Dordrecht, 1994. 10.1007/978-94-017-2434-0Search in Google Scholar
[10] S. Destercke, Independence and 2-monotonicity: Nice to have, hard to keep, Internat. J. Approx. Reason. 54 (2013), no. 4, 478–490. 10.1016/j.ijar.2012.11.002Search in Google Scholar
[11] N. Dunford and J. T. Schwartz, Linear Operators. Part I: General Theory, Wiley Class. Libr., John Wiley & Sons, New York, 1958. Search in Google Scholar
[12] R. Dyckerhoff, Personal communication, 2022. Search in Google Scholar
[13] S. Eckstein, G. Guo, T. Lim and J. Obłój, Robust pricing and hedging of options on multiple assets and its numerics, SIAM J. Financial Math. 12 (2021), no. 1, 158–188. 10.1137/19M1286256Search in Google Scholar
[14] H. Föllmer and A. Schied, Stochastic Finance: An Introduction in Discrete Time, 4th. ed., De Gruyter Grad., De Gruyter, Berlin, 2016. 10.1515/9783110463453Search in Google Scholar
[15] A. Galichon, Optimal Transport Methods in Economics, Princeton University, Princeton, 2016. 10.23943/princeton/9780691172767.001.0001Search in Google Scholar
[16] J. C. Garcia-Cespedes, J. A. de Juan Herrero, D. Rosen and D. Saunders, Effective modelling of wrong-way risk, CCR capital and alpha in Basel II, J. Risk Model Validation 4 (2010), no. 1, 71–98. 10.21314/JRMV.2010.050Search in Google Scholar
[17] P. Ghirardato, On independence for non-additive measures, with a Fubini theorem, J. Econom. Theory 73 (1997), no. 2, 261–291. 10.1006/jeth.1996.2241Search in Google Scholar
[18] M. Ghossoub, J. Hall and D. Saunders, Maximum spectral measures of risk with given risk factor marginal distributions, Math. Oper. Res. 48 (2023), no. 2, 1158–1182. 10.1287/moor.2022.1299Search in Google Scholar
[19] P. Glasserman and L. Yang, Bounding wrong-way risk in CVA calculation, Math. Finance 28 (2018), no. 1, 268–305. 10.1111/mafi.12141Search in Google Scholar
[20] M. Grabisch, Set Functions, Games and Capacities in Decision Making, Springer, Cham, 2016. 10.1007/978-3-319-30690-2Search in Google Scholar
[21] J. Gregory, The xVA Challenge: Counterparty Risk, Funding, Collateral, Capital and Initial Margin, John Wiley & Sons, New York, 2020. 10.1002/9781119508991Search in Google Scholar
[22] N. Guillen and J. Kitagawa, Pointwise estimates and regularity in geometric optics and other generated Jacobian equations, Comm. Pure Appl. Math. 70 (2017), no. 6, 1146–1220. 10.1002/cpa.21691Search in Google Scholar
[23] M. R. Hardy and D. Saunders, Quantitative Enterprise Risk Management, Cambridge University, Cambridge, 2022. 10.1017/9781009089470Search in Google Scholar
[24] E. Hendon, H. J. Jacobsen, B. Sloth and T. Tran, The product of capacities and lower probabilities, Technical report, University of Copenhagen, 1991. Search in Google Scholar
[25] P. Henry-Labordère, Model-Free Hedging: A Martingale Optimal Transport Viewpoint, Chapman & Hall/CRC Financial Math. Ser., CRC Press, Boca Raton, 2017. 10.1201/9781315161747Search in Google Scholar
[26] L. V Kantorovich, On the translocation of masses, C. R. (Doklady) Acad. Sci. URSS (N. S.) 37 (1942), 199–201. Search in Google Scholar
[27] L. V. Kantorovich, On a problem of Monge (in Russian), Uspekhi Math. Nauk. 3 (1948), 225–226. Search in Google Scholar
[28] J. Korman and R. J. McCann, Optimal transportation with capacity constraints, Trans. Amer. Math. Soc. 367 (2015), no. 3, 1501–1521. 10.1090/S0002-9947-2014-06032-7Search in Google Scholar
[29] J. Korman, R. J. McCann and C. Seis, Dual potentials for capacity constrained optimal transport, Calc. Var. Partial Differential Equations 54 (2015), no. 1, 573–584. 10.1007/s00526-014-0795-9Search in Google Scholar
[30] G. A. Koshevoy, Distributive lattices and products of capacities, J. Math. Anal. Appl. 219 (1998), no. 2, 427–441. 10.1006/jmaa.1997.5830Search in Google Scholar
[31] S. Kusuoka, On law invariant coherent risk measures, Advances in Mathematical Economics. Vol. 3, Adv. Math. Econ. 3, Springer, Tokyo (2001), 83–95. 10.1007/978-4-431-67891-5_4Search in Google Scholar
[32] R. J. McCann, Displacement convexity of Boltzmann’s entropy characterizes the strong energy condition from general relativity, Camb. J. Math. 8 (2020), no. 3, 609–681. 10.4310/CJM.2020.v8.n3.a4Search in Google Scholar
[33] R. J. McCann and K. S. Zhang, On concavity of the monopolist’s problem facing consumers with nonlinear price preferences, Comm. Pure Appl. Math. 72 (2019), no. 7, 1386–1423. 10.1002/cpa.21817Search in Google Scholar
[34] A. J. McNeil, R. Frey and P. Embrechts, Quantitative Risk Management, 2nd ed., Princeton University, Princeton, 2015. Search in Google Scholar
[35] A. Memartoluie, D. Saunders and T. Wirjanto, Wrong-way risk bounds in counterparty credit risk management, J. Risk Manag. Financial Inst. 10 (2017), no. 2, 150–163. Search in Google Scholar
[36] G. Monge, Mémoire sur la théorie des déblais et des remblais (Dissertation on the theory of cuttings and embankments), Mem. Math. Phys. Acad. Royale Sci. (1781), 666–704. Search in Google Scholar
[37] V. M. Panaretos and Y. Zemel, An Invitation to Statistics in Wasserstein Space, Springer Briefs Probab. Math. Statist., Springer, Cham 2020. 10.1007/978-3-030-38438-8Search in Google Scholar
[38] T. Pennanen and A.-P. Perkkiö, Convex duality in nonlinear optimal transport, J. Funct. Anal. 277 (2019), no. 4, 1029–1060. 10.1016/j.jfa.2019.04.010Search in Google Scholar
[39] G. Peyré and M. Cuturi, Computational optimal transport: With applications to data science, Found. Trends 11 (2019), no. 5–6, 355–607. 10.1561/2200000073Search in Google Scholar
[40] J. Quiggin, A theory of anticipated utility, J. Econ. Behavior & Organiz. 3 (1982), no. 4, 323–343. 10.1016/0167-2681(82)90008-7Search in Google Scholar
[41] J. Quiggin, Generalized Expected Utility Theory - The Rank-Dependent Model, Kluwer Academic, Dordrecht, 1993. 10.1007/978-94-011-2182-8Search in Google Scholar
[42] S. T. Rachev and L. Rüschendorf, Mass Transportation Problems, Springer, New York, 1998. Search in Google Scholar
[43] S. T. Rachev and L. Rüschendorf, Mass Transportation Problems. Vol. I. Theory, Probab. Appl. (New York), Springer, New York, 1998. Search in Google Scholar
[44] D. Rosen and D. Saunders, Computing and stress testing counterparty credit risk capital, Counterparty Credit Risk, Risk Books, London (2010), 245–292. Search in Google Scholar
[45] D. Rosen and D. Saunders, CVA the wrong way, J. Risk Manag. Financial Inst. 5 (2012), no. 3, 252–272. Search in Google Scholar
[46] L. Rüschendorf, Mathematical Risk Analysis, Springer Ser. Oper. Res. Financ. Eng., Springer, Berlin, 2013. 10.1007/978-3-642-33590-7Search in Google Scholar
[47] F. Santambrogio, Optimal Transport for Applied Mathematicians, Progr. Nonlinear Differential Equations Appl. 87, Birkhäuser/Springer, Cham, 2015. 10.1007/978-3-319-20828-2Search in Google Scholar
[48] D. Schmeidler, Integral representation without additivity, Proc. Amer. Math. Soc. 97 (1986), no. 2, 255–261. 10.1090/S0002-9939-1986-0835875-8Search in Google Scholar
[49] D. Schmeidler, Subjective probability and expected utility without additivity, Econometrica 57 (1989), no. 3, 571–587. 10.2307/1911053Search in Google Scholar
[50] A. Shapiro, On Kusuoka representation of law invariant risk measures, Math. Oper. Res. 38 (2013), no. 1, 142–152. 10.1287/moor.1120.0563Search in Google Scholar
[51] V. Torra, The transport problem for non-additive measures, European J. Oper. Res. 311 (2023), no. 2, 679–689. 10.1016/j.ejor.2023.03.016Search in Google Scholar
[52] L. C. Torres, L. M. Pereira and M. H. Amini, A survey on optimal transport for machine learning: Theory and applications, preprint (2021), https://arxiv.org/abs/2106.01963. Search in Google Scholar
[53] C. Villani, Topics in Optimal Transportation, Grad. Stud. Math. 58, American Mathematical Society, Providence, 2003. Search in Google Scholar
[54] C. Villani, Optimal Transport. Old and New, Grundlehren Math. Wiss. 338, Springer, Berlin, 2008. 10.1007/978-3-540-71050-9Search in Google Scholar
[55] P. Walley and T. L. Fine, Towards a frequentist theory of upper and lower probability, Ann. Statist. 10 (1982), no. 3, 741–761. 10.1214/aos/1176345868Search in Google Scholar
[56] M. E. Yaari, The dual theory of choice under risk, Econometrica 55 (1987), no. 1, 95–115. 10.2307/1911158Search in Google Scholar
[57] K. S. Zhang, G. Peyré, J. Fadili and M. Pereyra, Wasserstein control of mirror Langevin Monte Carlo, Proc. Mach. Learn. Res. (PMLR) 125 (2020), 1–28. Search in Google Scholar
© 2023 Walter de Gruyter GmbH, Berlin/Boston
Articles in the same Issue
- Frontmatter
- Product of bi-dimensional VAR(1) model components. An application to the cost of electricity load prediction errors
- Portfolio selection based on Extended Gini Shortfall risk measures
- Bounds on Choquet risk measures in finite product spaces with ambiguous marginals
Articles in the same Issue
- Frontmatter
- Product of bi-dimensional VAR(1) model components. An application to the cost of electricity load prediction errors
- Portfolio selection based on Extended Gini Shortfall risk measures
- Bounds on Choquet risk measures in finite product spaces with ambiguous marginals