Fair estimation of capital risk allocation

Risk Based Capital Allocation

Coherent allocation of risk capital∗

The allocation problem stems from the diversification effect observed in risk measurements of financial portfolios: the sum of the “risks” of many portfolios is larger than the “risk” of the sum of the portfolios. The allocation problem is to apportion this diversification advantage to the portfolios in a fair manner, yielding, for each portfolio, a risk appraisal that accounts for diversificat...

On the impossibility of fair risk allocation∗

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 a coherent measure of risk it is impossible to allocate risk satisfying the natural requirements of (Solution) Core Compatibility, Equal Treatment Prope...

Risk Measures , Risk Aggregation and Capital Allocation

We consider risk measures, risk aggregation and capital allocation in these lecture notes and build on our earlier introduction to Value-at-Risk (VaR) and Expected Shortfall (ES). We will follow Chapter 8 of the 2 edition of Quantitative Risk Management by MFE quite closely. This chapter, however, contains considerably more material than we will cover and it should be consulted if further detai...

Fair risk allocation in illiquid markets

Let us consider a financially constrained leveraged financial firm having some divisions which have invested into some risky assets. Using coherent measures of risk the sum of the capital requirements of the divisions is larger than the capital requirement of the firm itself, there is some diversification benefit that should be allocated somehow for proper performance evaluation of the division...