A Copula-Based Simulation Model for Supply Portfolio Risk

Sak, Halis; Haksöz, Ç.

Abstract

We introduce a copula-based simulation model for supply portfolio risk in the presence of dependent breaches of contracts. We demonstrate our method for a supply chain contract portfolio of commodity metals traded at the London Metal Exchange (LME). The analysis of spot price data of six LME commodity metals gives us the motive to use a t-copula dependence structure with the t and the generalized hyperbolic marginals for the log-returns. We also provide an efficient simulation algorithm using importance sampling to quantify risk measures, supply-at-risk (SaR) and conditional supply-at-risk (cSaR). Numerical examples on a portfolio of six commodity metals demonstrate that our proposed method succeeds in decreasing the variance of the simulations. To our knowledge, this is the first paper proposing efficient simulation algorithms on a supply chain contract portfolio having a copula-based dependence structure with the generalized hyperbolic marginals.

Citation

Sak, H., & Haksöz, Ç. (2011). A Copula-Based Simulation Model for Supply Portfolio Risk. Journal of Operational Risk, 6(3), 15-38. https://doi.org/10.21314/jop.2011.093

• Journal Article Type: Article
• Acceptance Date: Jan 1, 2011
• Online Publication Date: Jan 1, 2011
• Publication Date: 2011
• Deposit Date: Sep 23, 2019
• Journal: The Journal of Operational Risk
• Print ISSN: 1744-6740
• Electronic ISSN: 1755-2710
• Publisher: Infopro Digital Services
• Peer Reviewed: Peer Reviewed
• Volume: 6
• Issue: 3
• Pages: 15-38.
• DOI: https://doi.org/10.21314/jop.2011.093
• Keywords: Breach of contract risk, Supply chain contracts, Procurement, Copula, Dependence, Importance sampling, Commodity metals
• Public URL: https://durham-repository.worktribe.com/output/1285749