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On the Impossibility of Fair Risk Allocation

Author

Listed:
  • Peter Csoka

    () (Institute of Economics - Hungarian Academy of Sciences)

  • Miklos Pinter

    () (Department of Mathematics - Corvinus University of Budapest)

Abstract

Measuring and allocating risk properly are crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. We show that by using coherent measures of risk it is impossible to allocate risk satisfying the natural requirements of (Solution) Core Compatibility, Equal Treatment Property and Strong Monotonicity. To obtain the result we characterize the Shapley value on the class of totally balanced games and also on the class of exact games. Our result can also be seen as a downside of coherent measures of risk.

Suggested Citation

  • Peter Csoka & Miklos Pinter, 2011. "On the Impossibility of Fair Risk Allocation," IEHAS Discussion Papers 1117, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:1117
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    References listed on IDEAS

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    Cited by:

    1. Hougaard, Jens Leth & Smilgins, Aleksandrs, 2016. "Risk capital allocation with autonomous subunits: The Lorenz set," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 151-157.

    More about this item

    Keywords

    Coherent Measures of Risk; Risk Allocation Games; Totally Balanced Games; Exact Games; Shapley value; Solution core;

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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