Abstract
This paper is a companion to Manistre and Hancock's (2005)* paper on the CTE estimator (Conditional Tail Expectation; also known as Tail Value-at-Risk, TVaR). This paper intends to implement Monte Carlo simulations in the R statistical environment. The R codes are included, and executable programs can be found on my personal webpage. CTE is the preferred measure for statutory balance sheet valuation when stochastic methods are used to set liability provisions. M&H discusses the CTE closed-form solution and statistical properties for the variance of CTE estimate. European put (in-the-money as well as out-of-the-money) is used for intuitive illustration of the sampling and variance reduction methods (such as importance sampling and stratification). The analytically tractable Pareto distribution is also implemented along with the normal distribution.
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