Elliptical Distributions

Vadym Omelchenko

Examples of the Elliptical Distributions

Normal Distribution
Laplace Distribution
t-Student Distribution
Cauchy Distribution
Logistic Distribution
Symmetric Stable Laws

Examples of the Elliptical Distributions

Examples of the Elliptical Distributions

Bivariate Normal
Distribution

0
N
0

1

,

Multivariate Normal Distribution

with correlation equal to 0.7

The further from zero the more evident

ellipticity of the map, when observing it
from above. When =0 then the map has
the spherical form.

Laplace bivariate
distribution

Definition of elliptical
distributions

T
X

(
X
,...,
X
)
The random vector
is said to
1
n
have an elliptical distribution with
(n 1)vector
(the
n matrix
n)
parameters
and
if its characteristic function can be
expressed as T
T
T

E exp(it X) exp(it ) ( t t ),

scalar
t some
(t1 , t 2 ,...,
t n ) function

T
for

and where
AAT
and are given by

Characteristic Function of the

Symmetric Stable Distributions

E (it X) exp(it ) (t )
2

( t ) exp(it ) exp( t )

( t ) exp(it ) exp t 2

() exp

/2

/2

If X has an elliptical distribution, we write

X En ( , , ) where is called
characteristic generator of X and hence, the
characteristic generator of the multivariate
(u )
u /by
2).
normal
isexp(
given
The random vector X does not, in general,
possess a density f X ( x ) but if it does, it
will have the form

f X ( x)

cn

g n ( x )T 1 ( x )

For some non-negative functiong n () called

cn
density generator and for some constant
called normalizing constant.

Alternative Denoting of the

Elliptical Distributions

En ( , , g n ) whereg n (.) is the

X
g n (.)that
density generator assuming
exists.

Mean and Covariance Properties

If X En ( , , ) then if the mean exists then

it will be E ( X )
If the variance matrix exists, it will be

(0)
Cov ( X )

That is, the matrix coincides with the

covariance matrix up to the constant.

Mean and Covariance Properties

Examples of the distributions that dont

have mean nor variance:

All stable distributions whose index of

stability is lower than 1, e.g. Cauchy or
Levy.

Mean and Covariance Properties

Let X En ( , , g n ), let B be a
b R q. Then

b BX

q nmatrix and

Eq (b B , BB , g q )
T

X r Er ( 1 , 11 , g r )
En ( , , g.nThen
)
En r ( 2 , 22 , g n r )

Corollary. Let X

X nr

Hence marginal distributions of elliptical distributions are elliptical distributions.

Convolutional Properties

If S n X 1 X 2 ... X n
and X ( X 1 , X 2 ,..., X n )
L ( X ) E n ( , , g n )
Then
L(S) E1 (e , e e, g1 )
T

Convolutional Properties

Hence follows that the sum of elliptical

distribution is an elliptical distribution. This
property is very important when we deal
with portfolio of assets, represented by
sum.

Basic Properties of the Elliptical

Distributions

1. Elliptical distributions can be seen as an

extension of the Normal distribution

2. Any linear combination of elliptical

distributions is an elliptical distribution

3. Zero correlation of two normal variables

implies independence only for Normal
distribution. This implication does not hold
for any other elliptical distribution.

Basic Properties of the Elliptical

Distributions
4. X
E p ( , , ) with rank()=k if X has
the same distribution as

rA u
T

(k )

Where r 0 (radius ) andu

is uniformly
n
R
distributed on unit sphere surface in
and
A is a (kp) matrix such that
(k )

A A
T

Basic Properties of the Elliptical

Distributions

As it was mentioned above, if the elliptically

distributed function has a density then it is of the
form:
cn
f X ( x)
g n ( x )T 1 ( x )

The condition

n / 2 1
x
g n ( x ) dx

guarantees that

g n (.)

is a density generator.

(n / 2) 1
n / 2 1
cn
D
;
D

x
g n ( x)dx
n/2

(2 )
0

Examples of density
generators
g n (u ) (1 u ) ( n 1) / 2

Cauchy
Exponential

power

g n (u ) exp[ r u s ], r , s 0

Laplace

g n (u ) exp( u )

Logistic

g n (u )

Normal

g n (u ) exp(u / 2)

Student

exp(u )
[1 exp(u )]2

u
g n (u ) 1
m

( n m ) / 2

,m 0

an

integer

Construction of a density
function with infinite variance
1
g1 (u )
,
(1 u ) a
if

1 / 2 1

dx
g1 ( x) dx
a
0 (1 x )

dx
a 1 / 2

c1

a 1/ 2

f X ( x)

c1 1
c

g1
( x )2 1
2

1
a

( x )2
1
2

c
1
dx
EX x f X ( x)dx x 1
dx

const

a
2 a 1

x
1

( x )2
1
2

if a 1. If a (1 / 2, 1] then X has infinite mean

2

EX 2 x f X ( x)dx x 2

c1

if

a 3 / 2.

( x )2
2

dx const

dx
x

2a 2

Construction of a density
function with infinite variance

if a (0.5, 1] then X has an infinite mean

if a (1, 1.5] then X has a finite mean and infinite variance
if a (1.5, ) then both moments are finite

Financial Application
Expected Shortfall

The expected shortfall (or tail conditional

expectation) is defined as follows:

TCE X ( xq ) E ( X X xq )

and can be interpreted as the expected

worse losses.

F ( xq ) 1 q

Expected Shortfall
2

For the familiar normal distribution N(, ),

with mean and variance
2 , it was noticed
by Panjer (2002) that:

1 xq

TCE X ( xq )

xq

Generalization of the
Previous Formula

Suppose that g(x) is a non-negative function

for any positive number, satisfying the
condition that:

g ( x)
dx
x

Then g(x) can be a density generator of a

univariate elliptical distribution of a random
variable X E1 ( , 2 , g )

Generalization of the Formula

for the Normal Law

The density of this function has the form:

c 1 x
f X ( x) g

where c is a normalizing constant.

If X has an elliptical distribution then
X
Z

Has a standard elliptical distribution

(spherical)

Generalization of the Formula

for the Normal Law

The distribution function of Z has the form:

z

FZ (u ) c g 1 / 2 u 2 du ,

With mean 0 and variance equal to

Z 2c u 2 g (1 / 2 u 2 )du ' (0).

0

Generalization of the Formula

for the Normal Law

Define the function G(x) which we will call

cumulative generator.
x

G ( x ) c g (u ) du
0

G ( ) ,
Define
~
G(x) G() - G(x)

Theorem 1

Let X En ( , 2 , g ) and G be the cumulative

generator. Under condition (*), the tail
conditional expectation of X is given by

TCE X ( xq ) ,
2

Where is expressed as
~ 1 2
~ 1 2
G
zq
G
zq
2
2

FX ( xq )
FZ ( z q )

Examples

1. For Cauchy distribution the TCE doesnt

exist. Because it doesnt satisfy conditions
of the theorem

Logistic Distribution

1
1 ~ 1 2
1
(1 / 2 ) z q2

G
zq
1

2
2

1
(1 / 2 ) z q2
1
e
( zq )
1
1
2

2
1
1
1

(
1
/
2
)
z
2
2
q

e
( zq )
2
2
2
zq
1
1

FZ ( z q )

tanh
2
2
2

( zq )

(
z
)
q

TCE q
zq

1 tanh
2

Sums of Elliptical Risks

En ( , , g n )

and

e (1,1,...,1)T is the

Suppose X
vector of ones with dimension n. Define
n

S n X 1 X 2 ... X n X k eT X
k 1

Theorem 2

The TCE can be expressed as

TCE S ( sq ) s S S2
where s e T k 1 k , S2 eT e j 1,k 1
n

j ,k

and
1 ~ 1 2
G z s ,q
S 2

S
,
FZ ( z s ,q )
with z s ,q ( sq S ) / S

This theorem holds as a result of

convolution properties of the elliptical
distributions and the previous theorem.

Sums of Elliptical Risks

E n ( , , g n )

and

e (1,1,...,1)T

Suppose X
is the
vector of ones with dimension n, and
n

S n X 1 X 2 ... X n X k eT X
k 1

Then the contribution ofX k ,1 k n to the

overall risk can be expressed as:
TCE X k S ( sq ) k S k S k , S ,
for
where

k 1,2,..., n

k ,S

k ,S
k S

Skewed Elliptical
Distributions
All elliptical distributions belong to this
family.
All stable distributions belong to this family.
The density of the skewd Normal
Distribution has a form:
f ( x) 2 ( x) ( x)

(.) is density function of normal law

(.) is the distribution function of normal law

is the skewness parameter

0 positively skewed
0 negatively skewed
0 symmetric

Skewed

Stable
Distribution
s

Literatura
1. TAIL CONDITIONAL EXPECTATIONS
FOR ELLIPTICAL
DISTRIBUTIONS
Zinoviy M. Landsman* and Emiliano A.
Valdez
2. CAPM and Option Pricing with Elliptical
Distributions, Hamada M, Valdez.
3. Handbook of Heavy Tailed Distributions in
Finance, Eds S.T. Rachev