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To split or not to split: Capital allocation with convex risk measures

Tsanakas, A. (2007). To split or not to split: Capital allocation with convex risk measures (Report No. Actuarial Research Paper No. 184). London, UK: Faculty of Actuarial Science & Insurance, City University London.

Abstract

Convex risk measures were introduced by Deprez and Gerber (1985). Here the problem of allocating risk capital to subportfolios is addressed, when aggregate capital is calculated by a convex risk measure. The Aumann-Shapley value is proposed as an appropriate allocation mechanism. Distortion-exponential measures are discussed extensively and explicit capital allocation formulas are obtained for the case that the risk measure belongs to this family. Finally the implications of capital allocation with a convex risk measure for the stability of portfolios are discussed.

Publication Type: Monograph (Working Paper)
Publisher Keywords: Convex measures of risk, capital allocation, Aumann-Shapley value, inf-convolution
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Actuarial Science & Insurance > Actuarial Research Reports
URI: http://openaccess.city.ac.uk/id/eprint/2315
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