On Tail Dependence Matrices -- The Realization Problem for Parametric Families

TL;DR

This paper investigates the realization problem for tail dependence matrices (TDMs), revealing its computational complexity, and proposes methods leveraging symmetry and sparsity to achieve polynomial-time algorithms for certain parametric classes.

Contribution

It introduces a linear programming approach linking TDM realization to the max-cut problem and develops techniques exploiting symmetry and sparsity for efficient solutions.

Findings

Connection between TDM realization and max-cut problem.

Polynomial algorithms for certain parametric TDM classes.

Reduction of LP complexity using symmetry and sparsity.

Abstract

Among bivariate tail dependence measures, the tail dependence coefficient has emerged as the popular choice. Akin to the correlation matrix, a multivariate dependence measure is constructed using these bivariate measures, and this is referred to in the literature as the tail dependence matrix (TDM). While the problem of determining whether a given ${d\times d}$ matrix is a correlation matrix is of the order $O(d^3)$ in complexity, determining if a matrix is a TDM (the realization problem) is believed to be non-polynomial in complexity. Using a linear programming (LP) formulation, we show that the combinatorial structure of the constraints is related to the intractable max-cut problem in a weighted graph. This connection provides an avenue for constructing parametric classes admitting a polynomial in $d$ algorithm for determining membership in its constraint polytope. The complexity of the general realization problem is justifiably of much theoretical interest. Since in practice one resorts to lower dimensional parametrization of the TDMs, we posit that it is rather the complexity of the realization problem restricted to parametric classes of TDMs, and algorithms for it, that are more practically relevant. In this paper, we show how the inherent symmetry and sparsity in a parametrization can be exploited to achieve a significant reduction in the LP formulation, which can lead to polynomial complexity of such realization problems - some parametrizations even resulting in the constraint polytope being independent of $d$. We also explore the use of a probabilistic viewpoint on TDMs to derive the constraint polytopes.