Risk Concentration and Diversification: Second-Order Properties
AbstractThe 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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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0910.2367.
Date of creation: Oct 2009
Date of revision: Dec 2009
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-17 (All new papers)
- NEP-REG-2009-10-17 (Regulation)
- NEP-RMG-2009-10-17 (Risk Management)
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- 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.
- 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.
- 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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