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Efficient simulations in the t-Copula model of supply portfolio risk considering breach of contract probabilities

Sak, Halis and Haksöz, Çağrı (2011) Efficient simulations in the t-Copula model of supply portfolio risk considering breach of contract probabilities. [Working Paper / Technical Report] Sabanci University ID:SU_FMAN_2011/0002

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Abstract

We consider two different risks for a supply portfolio namely market risk (changes in the spot market price of the commodity exchanged in supply chain contracts) and breach of contract risk (related to the supplier defaults) simultaneously in a copula-based model. As it is quite subtle to model this common dependence structure, we use two independent t-copula dependence structures for market and breach of contract risks. An efficient simulation algorithm integrating conditional Monte Carlo and importance sampling based on cross-entropy is proposed for quantifying the risk measure supply-at-risk (SaR) under the proposed model. Numerical results for a realistic commodity metal portfolio demonstrates the value of the proposed ecient simulation algorithm.

Item Type:Working Paper / Technical Report
Uncontrolled Keywords:Breach of contract risk, Supplier default, Supply chain contracts, Copula models, Importance sampling, Cross-entropy method, Conditional Monte Carlo, Commodity metals
Subjects:H Social Sciences > HD Industries. Land use. Labor > HD0028 Management. Industrial Management
T Technology > T Technology (General) > T055.4-60.8 Industrial engineering. Management engineering
Q Science > QA Mathematics > QA273-280 Probabilities. Mathematical statistics
H Social Sciences > HG Finance > HG4001-4285 Financial management. Business finance. Corporation finance
H Social Sciences > HD Industries. Land use. Labor > HD0061 Risk Management
H Social Sciences > HA Statistics
T Technology > TS Manufactures > TS0155-194 Production management. Operations management
ID Code:16597
Deposited By:Çağrı Haksöz
Deposited On:14 Jul 2011 11:29
Last Modified:14 Jul 2011 11:29

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