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To split or not to split: Capital allocation with convex risk measures

  • Tsanakas, Andreas
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    Convex risk measures were introduced by Deprez and Gerber [Deprez, O., Gerber, H.U., 1985. On convex principles of premium calculation. Insurance: Math. Econom. 4 (3), 179-189]. Here the problem of allocating risk capital to subportfolios is addressed, when convex risk measures are used. The Aumann-Shapley value is proposed as an appropriate allocation mechanism. Distortion-exponential measures are discussed extensively and explicit capital allocation formulas are obtained for the case that the risk measure belongs to this family. Finally the implications of capital allocation with a convex risk measure for the stability of portfolios are discussed. It is demonstrated that using a convex risk measure for capital allocation can produce an incentive for infinite fragmentation of portfolios.

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    File URL: http://www.sciencedirect.com/science/article/B6V8N-4S4TNSP-1/2/5cbab83b34716a211fc28ead200b13d9
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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 44 (2009)
    Issue (Month): 2 (April)
    Pages: 268-277

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    Handle: RePEc:eee:insuma:v:44:y:2009:i:2:p:268-277
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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