Risk allocation under liquidity constraints
Risk allocation games are cooperative games that are used to attribute the risk of a financial entity to its divisions. In this paper, we extend the literature on risk allocation games by incorporating liquidity considerations. A liquidity policy specifies state-dependent liquidity requirements that a portfolio should obey. To comply with the liquidity policy, a financial entity may have to liquidate part of its assets, which is costly. The definition of a risk allocation game under liquidity constraints is not straight-forward, since the presence of a liquidity policy leads to externalities. We argue that the standard worst case approach should not be used here and present an alternative definition. We show that the resulting class of transferable utility games coincides with the class of totally balanced games. It follows from our results that also when taking liquidity considerations into account there is always a stable way to allocate
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- Péter Csóka & P. Jean-Jacques Herings & László Á. Kóczy, 2007.
"Stable Allocations of Risk,"
Working Paper Series
0802, Óbuda University, Keleti Faculty of Business and Management, revised Apr 2008.
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- Péter Csóka & Jean-Jacques Herings & László Kóczy, 2006. "Coherent Measures of Risk from a General Equilibrium Perspective," IEHAS Discussion Papers 0611, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 30 Aug 2006.
- Csóka, Péter & Herings, P. Jean-Jacques & Kóczy, László Á., 2006. "Coherent Measures of Risk from a General Equilibrium Perspective," Research Memorandum 016, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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