Browsing by Subject "log-normal distribution"

Sums of log-normally distributed random variables arise in numerous settings in the fields of finance and insurance mathematics, typically to model the value of a portfolio of assets over time. In particular, the use of the log-normal distribution in the popular Black-Scholes model allows future asset prices to exhibit heavy tails whilst still possessing finite moments, making the log-normal distribution an attractive assumption. Despite this, the distribution function of the sum of log-normal random variables cannot be expressed analytically, and has therefore been studied extensively through Monte Carlo methods and asymptotic techniques. The asymptotic behavior of log-normal sums is of especial interest to risk managers who wish to assess how a particular asset or portfolio behaves under market stress. This motivates the study of the asymptotic behavior of the left tail of a log-normal sum, particularly when the components are dependent. In this thesis, we characterize the asymptotic behavior of the left and right tail of a sum of dependent log-normal random variables under the assumption of a Gaussian copula. In the left tail, we derive exact asymptotic expressions for both the distribution function and the density of a log-normal sum. The asymptotic behavior turns out to be closely related to Markowitz mean-variance portfolio theory, which is used to derive the subset of components that contribute to the tail asymptotics of the sum. The asymptotic formulas are then used to derive expressions for expectations conditioned on log-normal sums. These formulas have direct applications in insurance and finance, particularly for the purposes of stress testing. However, we call into question the practical validity of the assumptions required for our asymptotic results, which limits their real-world applicability.