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Dynamic capital allocation with distortion risk measures

Tsanakas, A. (2004). Dynamic capital allocation with distortion risk measures. Insurance: Mathematics and Economics, 35(2), pp. 223-243. doi: 10.1016/j.insmatheco.2003.09.005


Tsanakas and Barnett [Insurance: Mathematics and Economics 33 (2003) 239] employed concepts from cooperative game theory [Aumann and Shapley, Values of Non-Atomic Games. Princeton University Press, Princeton] for the allocation of risk capital to portfolios of pooled liabilities, when distortion risk measures [Insurance: Mathematics and Economics 21 (2) (1997) 173] are used. In this paper we generalise previously obtained results in three directions. Firstly, we allow for the presence of non-linear portfolios. Secondly, based on the concept of correlation order [ASTIN Bulletin 26 (2) (1996) 201] we proceed with discussing the links between dependence structures, capital allocation and pricing, as well as dropping a restrictive assumption on the continuity of probability distributions. Finally, we generalise the capital allocation methodology to a dynamic setting and conclude with a numerical example.

Publication Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in <Journal title>. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Insurance: Mathematics and Economics, Volume 35, Issue 2, 11 October 2004, Pages 223–243,
Publisher Keywords: capital allocation, risk management, cooperative games, dynamic risk measures, distorted probability, correlation order
Subjects: H Social Sciences > HF Commerce
Departments: Bayes Business School > Actuarial Science & Insurance
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