Approximating non-Gaussian Bayesian networks using minimum information vine model with applications in financial modelling

Omid Chatrabgoun, Amin Hosseinian-Far, Victor Chang, Nigel Stocks, Alireza Daneshkhah

    Research output: Contribution to journalArticle

    Abstract

    Many financial modeling applications require to jointly model multiple uncertain quantities to present more accurate, near future probabilistic predictions. Informed decision making would certainly benefit from such predictions. Bayesian networks (BNs) and copulas are widely used for modeling numerous uncertain scenarios. Copulas, in particular, have attracted more interest due to their nice property of approximating the probability distribution of the data with heavy tail. Heavy tail data is frequently observed in financial applications. The standard multivariate copula suffer from serious limitations which made them unsuitable for modeling the financial data. An alternative copula model called the pair-copula construction (PCC) model is more flexible and efficient for modeling the complex dependence of financial data. The only restriction of PCC model is the challenge of selecting the best model structure. This issue can be tackled by capturing conditional independence using the Bayesian network PCC (BN-PCC). The flexible structure of this model can be derived from conditional independences statements learned from data. Additionally, the difficulty of computing conditional distributions in graphical models for non-Gaussian distributions can be eased using pair-copulas. In this paper, we extend this approach further using the minimum information vine model which results in a more flexible and efficient approach in understanding the complex dependence between multiple variables with heavy tail dependence and asymmetric features which appear widely in the financial applications.
    Original languageEnglish
    Pages (from-to)266-276
    Number of pages11
    JournalJournal of Computational Science
    Volume24
    Early online date6 Sep 2017
    DOIs
    Publication statusPublished - 31 Jan 2018

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