Multi-Variate Risk Measures under Wasserstein Barycenter

Abstract

When the uni-variate risk measure analysis is generalized into the multi-variate setting, many complex theoretical and applied problems arise, and therefore the mathematical models used for risk quantification usually present model risk. As a result, regulators have started to require that the internal models used by financial institutions are more precise. For this task, we propose a novel multi-variate risk measure, based on the notion of the Wasserstein barycenter. The proposed approach robustly characterizes the company’s exposure, filtering the partial information available from individual sources into an aggregate risk measure, providing an easily computable estimation of the total risk incurred. The new approach allows effective computation of Wasserstein barycenter risk measures in any location–scatter family, including the Gaussian case. In such cases, the Wasserstein barycenter Value-at-Risk belongs to the same family, thus it is characterized just by its mean and deviation. It is important to highlight that the proposed risk measure is expressed in closed analytic forms which facilitate its use in day-to-day risk management. The performance of the new multi-variate risk measures is illustrated in United States market indices of high volatility during the global financial crisis (2008) and during the COVID-19 pandemic situation, showing that the proposed approach provides the best forecasts of risk measures not only for “normal periods”, but also for periods of high volatility.