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Capital-Allocation-Induced Risk Sharing

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  • Wing Fung Chong
  • Runhuan Feng
  • Kenneth Tsz Hin Ng

Abstract

This article proposes a new class of risk-sharing rules by exploring the relationship between capital allocation and risk sharing. While the former is concerned with ex-ante allocating capitals to different lines of business within a corporation based on the relationship among the individual risks, often also through the aggregate risk, the latter is an arrangement which collects risks from and allocates them to, also ex-ante, a group of participants. Drawing on this analogy, we introduce a novel idea of inducing risk-sharing rules by randomizing existing capital allocation principles. Such an approach derives new risk-sharing rules complementing known results in the literature, which were largely based on economic principles and Pareto optimality.

Suggested Citation

  • Wing Fung Chong & Runhuan Feng & Kenneth Tsz Hin Ng, 2026. "Capital-Allocation-Induced Risk Sharing," Papers 2603.26491, arXiv.org.
    • Handle: RePEc:arx:papers:2603.26491
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    References listed on IDEAS

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