Rare-event, heavy-tailed simulations using hazard function transformations, with applications to value-at-risk

摘要

We develop an observation that a simulation method introduced recently for heavy-tailed stochastic simulation, namely hazard-rate twisting, is equivalent to doing exponential twisting on a transformed version of the heavy-tailed random-variable; the transforming function is the hazard function. Using this approach, the paper develops efficient methods for computing portfolio value-at-risk (VAR) when changes in the underlying risk factors have the multivariate Laplace distribution.