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Allocation of Economic Capital in Banking: A Simulation Approach

In: High Performance Computing in Science and Engineering '11

Author

Listed:
  • H.-P. Burghof

    (Universität Hohenheim, Lehrstuhl für Bankwirtschaft und Finanzdienstleistungen)

  • J. Müller

    (Universität Hohenheim, Lehrstuhl für Bankwirtschaft und Finanzdienstleistungen)

Abstract

The approach describes the difficulties implied through consistently equating a bank’s allocation of economic capital with an allocation of decision rights in the form of value-at-risk limits. These days, risk measurement through value-at-risk methods is widespread. Using these methods strategically in order to optimize the return to risk ratio actively on an overall bank level is hardly developed. Thereto we model a bank’s central planner coping with correlations’ uncertainty and learning about the limit addressees’ skills. In order to face the underlying mixed integer non linear program the model provides the central planner with a heuristic optimization approach. According to the given information and the assumed rationality of the central planner, resulting limit allocations are optimal in a portfolio theoretical sense. The numerical model generates a data set providing evidence concerning this allocation method’s superiority compared to others.

Suggested Citation

  • H.-P. Burghof & J. Müller, 2012. "Allocation of Economic Capital in Banking: A Simulation Approach," Springer Books, in: Wolfgang E. Nagel & Dietmar B. Kröner & Michael M. Resch (ed.), High Performance Computing in Science and Engineering '11, edition 127, pages 541-549, Springer.
    • Handle: RePEc:spr:sprchp:978-3-642-23869-7_39
    DOI: 10.1007/978-3-642-23869-7_39
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