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Risk Concentration and Diversification: Second-Order Properties

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  • Matthias Degen
  • Dominik D. Lambrigger
  • Johan Segers
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    Abstract

    The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today's risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit.

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    File URL: http://arxiv.org/pdf/0910.2367
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 0910.2367.

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    Date of creation: Oct 2009
    Date of revision: Dec 2009
    Handle: RePEc:arx:papers:0910.2367

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    Web page: http://arxiv.org/

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    1. Rustam Ibragimov & Dwight Jaffee & Johan Walden, 2009. "Nondiversification Traps in Catastrophe Insurance Markets," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 959-993, March.
    2. Ibragimov, Rustam & Walden, Johan, 2007. "The limits of diversification when losses may be large," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2551-2569, August.
    3. Walden, Johan & Ibragimov, Rustam, 2007. "The limits of diversification when losses may be large," Scholarly Articles 2624460, Harvard University Department of Economics.
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