Risk capital allocation: the Lorenz Set
Publikation: Working paper › Forskning
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Risk capital allocation : the Lorenz Set. / Hougaard, Jens Leth; Smilgins, Aleksandrs.
Department of Food and Resource Economics, University of Copenhagen, 2014.Publikation: Working paper › Forskning
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TY - UNPB
T1 - Risk capital allocation
T2 - the Lorenz Set
AU - Hougaard, Jens Leth
AU - Smilgins, Aleksandrs
PY - 2014
Y1 - 2014
N2 - 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.
AB - 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.
M3 - Working paper
T3 - MSAP Working Paper Series
BT - Risk capital allocation
PB - Department of Food and Resource Economics, University of Copenhagen
ER -
ID: 123832466