A Distribution for Modeling Dependence Caused by Common Risk Factors

T he cumulative distribution function (cdf) of a finite mixture of independent uniform random variables will be derived. The distribution is useful for uncertainty analyses in application domains such as, e.g., project risk analysis, decision analysis, finance, accident probability analysis and actuarial analysis, particularly when dependence between uncertain elements is present due to common risk factors. Use of the distribution reduces the number of dependence parameters that need to be assessed to specify dependence when compared to a correlation matrix approach. An example discussing the effect of dependence in the project risk analysis domain utilizing the mixture distribution is presented.