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The Shapley Value Decomposition Of Optimal Portfolios

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  • Haim Shalit

    (BGU)

Abstract

Investors want the ability to evaluate the true and complete risk of the financial assets held in a portfolio. Yet, the current analytic methods provide only partial risk measures. I suggest that, by viewing a portfolio of securities as a cooperative game played by the assets that minimize portfolio risk, investors can calculate the exact value, each security contributes to the common payoff of the game, which is known as the Shapley value. It is determined by computing the contribution of each asset to the portfolio risk by looking at all the possible coalitions in which the asset would participate. I develop this concept in order to decompose the risk of mean-variance and mean-Gini efficient portfolios. This decomposition gives us a better rank of assets by their comprehensive contribution to the risk of optimal portfolios. Such a procedure allows investors to make unbiased decisions when they analyze the inherent risk of their holdings. The Shapley value is calculated for index classes and the empirical results based on asset allocation data are contrary to some of the findings of conventional wisdom and beta analysis.
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Suggested Citation

  • Haim Shalit, 2017. "The Shapley Value Decomposition Of Optimal Portfolios," Working Papers 1701, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:1701
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    References listed on IDEAS

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    3. Haim Shalit, 2020. "The Shapley value of regression portfolios," Journal of Asset Management, Palgrave Macmillan, vol. 21(6), pages 506-512, October.
    4. Bastien Lextrait, 2022. "Optimizing portfolios in the illiquid, unlisted market of SME crowdlending," EconomiX Working Papers 2022-23, University of Paris Nanterre, EconomiX.
    5. Patrick S. Hagan & Andrew Lesniewski & Georgios E. Skoufis & Diana E. Woodward, 2021. "Portfolio risk allocation through Shapley value," Papers 2103.05453, arXiv.org.

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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