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Risk Concentration and Diversification: Second-Order Properties

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  • Matthias Degen
  • Dominik D. Lambrigger
  • Johan Segers

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.

Suggested Citation

  • Matthias Degen & Dominik D. Lambrigger & Johan Segers, 2009. "Risk Concentration and Diversification: Second-Order Properties," Papers 0910.2367, arXiv.org, revised Dec 2009.
    • Handle: RePEc:arx:papers:0910.2367
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    References listed on IDEAS

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    1. 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.
    2. Rustam Ibragimov & Dwight Jaffee & Johan Walden, 2009. "Nondiversification Traps in Catastrophe Insurance Markets," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 959-993.
    3. Barbe, Philippe & Fougères, Anne-Laure & Genest, Christian, 2006. "On the Tail Behavior of Sums of Dependent Risks," ASTIN Bulletin, Cambridge University Press, vol. 36(2), pages 361-373, November.
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