Corvinus
Corvinus

Properties of risk capital allocation methods: Core Compatibility, Equal Treatment Property and Strong Monotonicity

Balog, Dóra and Bátyi, Tamás László and Csóka, Péter and Pintér, Miklós (2014) Properties of risk capital allocation methods: Core Compatibility, Equal Treatment Property and Strong Monotonicity. Working Paper. Corvinus University of Budapest Faculty of Economics, Budapest.

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Abstract

In finance risk capital allocation raises important questions both from theoretical and practical points of view. How to share risk of a portfolio among its subportfolios? How to reserve capital in order to hedge existing risk and how to assign this to different business units? We use an axiomatic approach to examine risk capital allocation, that is we call for fundamental properties of the methods. Our starting point is Csóka and Pintér (2011) who show by generalizing Young (1985)'s axiomatization of the Shapley value that the requirements of Core Compatibility, Equal Treatment Property and Strong Monotonicity are irreconcilable given that risk is quantified by a coherent measure of risk. In this paper we look at these requirements using analytic and simulations tools. We examine allocation methods used in practice and also ones which are theoretically interesting. Our main result is that the problem raised by Csóka and Pintér (2011) is indeed relevant in practical applications, that is it is not only a theoretical problem. We also believe that through the characterizations of the examined methods our paper can serve as a useful guide for practitioners.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2014/13
Uncontrolled Keywords:Coherent Measures of Risk, Risk Capital Allocation, Shapley value, Core, Simulation
JEL classification:C71 - Cooperative Games
G10 - General Financial Markets: General (includes Measurement and Data)
Subjects:Mathematics, Econometrics
Funders:János Bolyai Research Scholarship of the Hungarian Academy of Sciences
Projects:MTA-BCE "Lendület" Strategic Interactions Research Group, HAS LP-004/2010, OTKA PD 105859, OTKA K 101224
ID Code:1659
Deposited By: Ádám Hoffmann
Deposited On:29 Jul 2014 14:13
Last Modified:29 Jul 2014 14:13

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