Risk Measures: Rationality and Diversification

Cerreia-Vioglio, Simone, Fabio Maccheroni, Massimo Marinacci and Luigi Montrucchio

No 100, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: When there is uncertainty about interest rates (typically due to either illiquidity or defaultability of zero coupon bonds) the cash- additivity assumption on risk measures becomes problematic. When this assumption is weakened, to cash-subadditivity for example, the equivalence between convexity and the diversi cation principle no longer holds. In fact, this principle only implies (and it is implied by) quasiconvexity. For this reason, in this paper quasiconvex risk measures are studied. We provide a dual characterization of quasiconvex cash-subadditive risk measures and we establish necessary and sufficient conditions for their law invariance. As a byproduct, we obtain an alternative characterization of the actuarial mean value premium principle.

Keywords: Risk Measures; Diversification; Cash-subadditivity; Quasiconvexity; Law-invariance; Mean Value Premium Principle (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:cca:wpaper:100

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