Risk capital allocation: the Lorenz Set
Research output: Working paper › Research
Risk capital allocation problems have been widely discussed in the academic literature. We consider a company with multiple subunits having individual portfolios. Hence, when portfolios of subunits are merged, a diversification benefit arises: the risk of the company as a whole is smaller than the sum of the risks of the individual sub-units. The question is how to allocate the risk capital of the company among the subunits in a fair way. In this paper we propose to use the Lorenz set as an allocation method. We show that the Lorenz set is operational and coherent. Moreover, we propose a set of new axioms related directly to the problem of risk capital allocation and show that the Lorenz set satisfies these new axioms in contrast to other well-known coherent methods. Finally, we discuss how to deal with non-uniqueness of the Lorenz set.
Original language | English |
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Publisher | Department of Food and Resource Economics, University of Copenhagen |
Number of pages | 20 |
Publication status | Published - 2014 |
Series | MSAP Working Paper Series |
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Number | 03/2014 |
ID: 123832466