What is it about?
Allocating risk properly to subunits is crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. Using coherent measures of risk (Expected Shortfall being a prominent example) there is a diversification effect that should be allocated in a fair way.
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Why is it important?
We have compared 7 methods in terms of 10 properties. If you are interested in certain fairness properties, you can use our results to choose for your specific application.
Perspectives
The paper is part of a bigger project. We have analyzed stability in the paper "Stable allocations of risk", whereas we have shown that there is no method satisfying stability and incentive compatibility (on the full domain of problems) in the paper "On the impossibility of fair risk allocation". We have considered illiquid portfolios in "Risk allocation under liquidity constraints" and in "Fair risk allocation in illiquid markets".
Dr Péter Csóka
Read the Original
This page is a summary of: Properties and comparison of risk capital allocation methods, European Journal of Operational Research, June 2017, Elsevier,
DOI: 10.1016/j.ejor.2016.10.052.
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