Computing risk measures by importance sampling
Seminar Room 1, Newton Institute
Computation of extreme quantiles and tail-based risk measures using standard Monte Carlo simulation can be inefficient. A method to speed up computations is provided by importance sampling. We show that importance sampling algorithms, designed for e¢ cient tail probability estimation, can signi.cantly improve Monte Carlo estimators of tail-based risk measures. In the heavy-tailed setting, when the random variable of interest has a regularly varying distribution, we provide su¢ cient conditions for the asymptotic relative error of importance sampling estimators of risk measures, such as Value-at-Risk and expected shortfall, to be small. The results are illustrated by some numerical examples.