Distributionally Robust Inference for Extreme Value-at-Risk

TL;DR

This paper develops a distributionally robust framework for bounding the extreme Value-at-Risk of portfolios under multivariate regular variation, using spectral measure constraints, and provides practical solutions with real data illustrations.

Contribution

It introduces a duality approach linking spectral measure optimization to linear semi-infinite programs, enabling explicit bounds and solutions for extreme Value-at-Risk.

Findings

Optimal spectral measures are supported on finitely many atoms.

Closed-form solutions for bounds in the case of a single extremal coefficient.

Connections established with Tawn-Molchanov max-stable models.

Abstract

Under general multivariate regular variation conditions, the extreme Value-at-Risk of a portfolio can be expressed as an integral of a known kernel with respect to a generally unknown spectral measure supported on the unit simplex. The estimation of the spectral measure is challenging in practice and virtually impossible in high dimensions. This motivates the problem studied in this work, which is to find universal lower and upper bounds of the extreme Value-at-Risk under practically estimable constraints. That is, we study the infimum and supremum of the extreme Value-at-Risk functional, over the infinite dimensional space of all possible spectral measures that meet a finite set of constraints. We focus on extremal coefficient constraints, which are popular and easy to interpret in practice. Our contributions are twofold. Firstly, we show that optimization problems over an infinite dimensional space of spectral measures are in fact dual problems to linear semi-infinite programs (LSIPs) -- linear optimization problems in an Euclidean space with an uncountable set of linear constraints. This allows us to prove that the optimal solutions are in fact attained by discrete spectral measures supported on finitely many atoms. Second, in the case of balanced portfolia, we establish further structural results for the lower bounds as well as closed form solutions for both the lower- and upper-bounds of extreme Value-at-Risk in the special case of a single extremal coefficient constraint. The solutions unveil important connections to the Tawn-Molchanov max-stable models. The results are illustrated with a real data example.