Holistic principle for risk aggregation and capital allocation

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...

Risk Measures , Risk Aggregation and Capital Allocation 2

In 1999 Artzner et al. proposed a list of properties that any good risk measure should have and this list gave rise to the concept of coherent and incoherent measures of risk. Since then a substantial body of research has developed on the theoretical properties of risk measures and we describe some of these results here. Let M denote the space of random variables representing portfolio losses o...

Risk Capital Aggregation

This article presents a new approach to determine the total risk of a financial institution. The proposed model includes components for credit, market, operational and business risk. Moreover it includes a component for the ownership risk that stems from holding a life insurance company. The approach may be characterised as a base-level aggregation method. However, due to lack of appropriate da...

Risk Based Capital Allocation

Risk capital allocation for RORAC optimization

This paper considers the financial optimization problem of a firm with several sub-businesses striving for its optimal RORAC. An insightful example shows that the implementation of classical gradient capital allocation can be suboptimal if division managers are allowed to venture into all business whose marginal RORAC exceeds the firm’s RORAC. The marginal RORAC requirements are refined by addi...