This paper studies optimal sovereign debt policy of the government with limited commitment and compare the optimal policies in economies with and without government’s private capital control. The comparison of optimal sovereign debt policies can rationalize why more financially open market economies show more severe allocation puzzle — more negative relationship between growth and public capita...

We consider some risk indicators of vectorial risk processes. These indicators take into account the dependencies between business lines as well as some temporal dependencies. By using stochastic algorithms, we may estimate the minimum of these risk indicators, under a fixed total capital constraint. This minimization may apply to capital reserve allocation.

Wben several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly among them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors' portfolio choice and the equilibrium in the capital market. This article features two investors, with the same de...

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...

Capital allocation decisions are made on the basis of an assessment of creditworthiness. Default is a rare event for most segments of a bank’s portfolio and data information can be minimal. Inference about default rates is essential for efficient capital allocation, for risk management and for compliance with the requirements of the Basel II rules on capital standards for banks. Expert informat...

The paper offers a straightforward method for estimating R&D portfolios that maximize shareholders’ utility. R&D portfolios are generally associated with high returns and high risks. As such, an impressive body of literature has highlighted the risks linked with R&D portfolio allocations. Nevertheless, the role of financing strategies in portfolio allocation has been neglected, and this provide...

A strategic optimization model provides the ideal setting for allocating the scarce capital of a financial intermediary such as an insurance company. The goal of management is to maximize shareholder value. Capital allocation serves three primary purposes: to compare managerial performance across business units, to provide a risk indicator for regulators and other stakeholders, and to develop a...

Because of regulation projects from control organizations such as the European solvency II reform and recent economic events, insurance companies need to consolidate their capital reserve with coherent amounts allocated to the whole company and to each line of business. The present study considers an insurance portfolio consisting of several lines of risk which are linked by a copula and aims t...

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...