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 show that there is always a stable way to allocate risk, where no subset (coalition) of the subunits can complain about the allocation. We also show that the less risk the main unit has, the more freedom it has to marginalize coalitions in a stable allocation of risk.
Perspectives
The paper is part of a bigger project. We have analyzed stability and incentive compatibility in the paper "On the impossibility of fair risk allocation", whereas to help in applications, we have compared 7 methods in terms of 10 properties in "Properties and comparison of risk capital allocation methods". 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: Stable allocations of risk, Games and Economic Behavior, September 2009, Elsevier,
DOI: 10.1016/j.geb.2008.11.001.
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