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 it is impossible to a stability and an incentive compatibility requirement at the same time, one has to decide between them.
Perspectives
The paper is part of a bigger project. We have analyzed stability in the paper "Stable allocations of risk", 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: On the Impossibility of Fair Risk Allocation, The B E Journal of Theoretical Economics, January 2016, De Gruyter,
DOI: 10.1515/bejte-2014-0051.
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