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A tale of two allocations: Risk capital contributions versus risk contributions in the tail

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  • Nawaf Mohammed
  • Edward Furman

Abstract

We compare two natural proportional notions of a risk component's contribution to the aggregate tail risk of a collection of risks: the fraction of aggregate tail risk capital allocated to the component under Conditional Tail Expectation (CTE), and the component's expected realized share of aggregate risk under Geometric Tail Expectation (GTE). The resulting proportional allocations generally differ. For arbitrary random vectors-allowing atoms, signed risks, and any tail domain--we establish when the allocations agree, determine their ordering when they do not, and characterize their asymptotic separation. Both proportional allocations are weighted averages of the conditional risk share of a component given the aggregate: the proportional CTE allocation weights tail scenarios by severity, whereas the proportional GTE allocation weights them uniformly. Their difference is therefore a normalized tail covariance. The proportional CTE and GTE allocations agree throughout a tail exactly when the conditional risk share is constant there; under a mild unimodality condition, dominance is characterized by its monotonicity. Among independent exponential dispersion models with heterogeneous natural parameters, exact agreement is possible only for the scaled Poisson family; under comonotonicity, it is equivalent to proportional quantile functions. In the extreme tail, the limiting relationship between the proportional CTE and GTE allocations is governed by the ratio of Expected Shortfall to Value-at-Risk: boundedness ensures common limits, convergence to one forces the allocations to merge, and divergence can cause their limits to separate.

Suggested Citation

  • Nawaf Mohammed & Edward Furman, 2026. "A tale of two allocations: Risk capital contributions versus risk contributions in the tail," Papers 2609.36177, arXiv.org.
  • Handle: RePEc:arx:papers:2609.36177
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    References listed on IDEAS

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