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Risk Measures: Rationality and Diversification

Author

Listed:
  • Simone Cerreia-Vioglio
  • Fabio Maccheroni
  • Massimo Marinacci
  • Luigi Montrucchio

Abstract

When there is uncertainty about interest rates (typically due to either illiquidity or defaultability of zero coupon bonds) the cash- additivity assumption on risk measures becomes problematic. When this assumption is weakened, to cash-subadditivity for example, the equivalence between convexity and the diversi cation principle no longer holds. In fact, this principle only implies (and it is implied by) quasiconvexity. For this reason, in this paper quasiconvex risk measures are studied. We provide a dual characterization of quasiconvex cash-subadditive risk measures and we establish necessary and sufficient conditions for their law invariance. As a byproduct, we obtain an alternative characterization of the actuarial mean value premium principle.

Suggested Citation

  • Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Luigi Montrucchio, 2008. "Risk Measures: Rationality and Diversification," Carlo Alberto Notebooks 100, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:100
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    More about this item

    Keywords

    Risk Measures; Diversification; Cash-subadditivity; Quasiconvexity; Law-invariance; Mean Value Premium Principle;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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