Capital-Allocation-Induced Risk Sharing

Wing Fung Chong, Runhuan Feng and Kenneth Tsz Hin Ng

Papers from arXiv.org

Abstract: This article proposes a new class of risk-sharing rules by exploring the relationship between capital allocation and risk sharing. While the former is concerned with ex-ante allocating capitals to different lines of business within a corporation based on the relationship among the individual risks, often also through the aggregate risk, the latter is an arrangement which collects risks from and allocates them to, also ex-ante, a group of participants. Drawing on this analogy, we introduce a novel idea of inducing risk-sharing rules by randomizing existing capital allocation principles. Such an approach derives new risk-sharing rules complementing known results in the literature, which were largely based on economic principles and Pareto optimality.

Date: 2026-03
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