Modern systems of risk management in financial institutions require a process of estimation of the amount of capital that is needed to cover losses arising from various types of risk and its allocation to business units in order to measure their risk-adjusted performance. In this paper we describe the structure of operational risk economic capital estimation model suitable for implementation of...

Evaluating capital requirements as well as allocating total capital into various business units are becoming increasingly important part of the risk management process of a financial enterprise. In the allocation of capital, we consider the purpose of capital allocation within a company (individual, collective, or market-relative), the manner in which the portfolios within the conglomerate can ...

Capital allocation techniques are of central importance in portfolio management and risk-based performance measurement. In this paper we propose an axiom system for capital allocation and analyze its satisfiability and completeness: it is shown that for a given risk measure ρ there exists a capital allocation Λρ which satisfies the main axioms if and only if ρ is sub-additive and positively hom...

The equity premium puzzle shows that using standard parameters and setup, the Consumption-based Capital Asset Pricing Model’s (CCAPM’s) prediction of the premium associated with systematic risk is out by an order of magnitude. The object of this paper is to consider the implications of each of the broad classes of explanations of the equity premium puzzle for resource allocation, welfare and po...

Related to the current discussion of value-at-risk-based capital allocation and performance management (RAPM) for managing bank capital, a risk theoretical RAPM-approach for propertylliability-insurance companies is presented. The paper discusses several central issues of a RAPM-approach: Virtual risk adjusted capital (VRAC) on the company level, return on risk adjusted capital (RORAC), risk ba...

Capital allocation for credit portfolios has two meanings. First, at portfolio level it means to determine capital as a buffer against an unexpected negative cash-flow resulting from credit losses. In this case, the allocation method can be specified by means of a risk measure. Its result is called economic capital of the portfolio. Second, at sub-portfolio or transaction level, capital allocat...

We show how decentralized individual investments can efficiently allocate capital to innovating firms. We consider consumers with privately known but correlated consumption preferences who also act as investors. Consumers identify worthwhile investment opportunities based on their own preferences and invest in firms whose product they like. An efficient capital allocation is achieved if all gro...

Capital allocation for credit portfolios has two meanings. First, at portfolio level it means to determine capital as a buffer against an unexpected negative cash-flow resulting from credit losses. In this case, the allocation method can be specified by means of a risk measure. Its result is called economic capital of the portfolio. Second, at sub-portfolio or transaction level, capital allocat...

This paper starts with primitive assumptions on consumer preferences and then derives prices consistent with a social optimum within an insurance company and the capital allocation implied therein. The implied allocation “adds up” to the total capital of the …rm (a result echoing …ndings in the congestion pricing literature— where optimal tolls exactly cover the rental cost of the highway). The...