• Bernoulli
  • Volume 23, Number 3 (2017), 1481-1517.

Saddlepoint methods for conditional expectations with applications to risk management

Sojung Kim and Kyoung-Kuk Kim

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The paper derives saddlepoint expansions for conditional expectations in the form of $\mathsf{E}[\overline{X}|\overline{\mathbf{Y}}=\mathbf{a}]$ and $\mathsf{E}[\overline{X}|\overline{\mathbf{Y}}\geq\mathbf{a}]$ for the sample mean of a continuous random vector $(X,\mathbf{Y}^{\top})$ whose joint moment generating function is available. Theses conditional expectations frequently appear in various applications, particularly in quantitative finance and risk management. Using the newly developed saddlepoint expansions, we propose fast and accurate methods to compute the sensitivities of risk measures such as value-at-risk and conditional value-at-risk, and the sensitivities of financial options with respect to a market parameter. Numerical studies are provided for the accuracy verification of the new approximations.

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Bernoulli Volume 23, Number 3 (2017), 1481-1517.

Received: July 2015
Revised: September 2015
First available in Project Euclid: 17 March 2017

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conditional expectation risk management saddlepoint approximation sensitivity estimation


Kim, Sojung; Kim, Kyoung-Kuk. Saddlepoint methods for conditional expectations with applications to risk management. Bernoulli 23 (2017), no. 3, 1481--1517. doi:10.3150/15-BEJ774.

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