A copula-based simulation model for supply portfolio risk

Sak, Halis and Haksöz, Çağrı (2011) A copula-based simulation model for supply portfolio risk. The Journal of Operational Risk, 6 (3). pp. 15-38. ISSN 1744-6740

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A copula-based simulation model for supply portfolio risk in the presence of dependent breaches of contracts is introduced in this paper. We demonstrate our method for a supply-chain contract portfolio of commodity metals traded at the London Metal Exchange (LME). The analysis of spot price data on six LME commodity metals leads us to use a t-copula dependence structure with t-marginals and generalized hyperbolic marginals for the log returns. We also provide efficient simulation algorithms using importance sampling for the normal and t - copula dependence structure to quantify risk measures, supply-at-risk and conditional supply-at-risk. Numerical examples on a portfolio of six commodity metals demonstrate that our proposed method succeeds in decreasing the variance of the simulations. A numerical sensitivity analysis for the choice of the copula function is also provided. To the best of our knowledge, this is the first paper proposing efficient simulation algorithms on a supply-chain contract portfolio that has a copula-based dependence structure with generalized hyperbolic marginals.

Item Type:Article
Uncontrolled Keywords:Breach of contract risk, Supply chain contracts, Procurement, Copula, Dependence, Importance sampling, Commodity metals
Subjects:H Social Sciences > HD Industries. Land use. Labor > HD0028 Management. Industrial Management
Q Science > QA Mathematics > QA273-280 Probabilities. Mathematical statistics
H Social Sciences > HD Industries. Land use. Labor > HD0061 Risk Management
H Social Sciences > HA Statistics
T Technology > T Technology (General) > T055.4-60.8 Industrial engineering. Management engineering > T57.6-57.97 Operations research. Systems analysis
T Technology > TS Manufactures > TS0155-194 Production management. Operations management
H Social Sciences > HG Finance > HG176.6 Financial engineering
ID Code:17251
Deposited By:Çağrı Haksöz
Deposited On:19 Oct 2011 15:50
Last Modified:30 Jul 2019 14:01

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