Can a Coherent Risk Measure Be Too Subadditive?

Jan Dhaene, Roger Laeven, Steven Vanduffel (), G. Darkiewicz and Marc Goovaerts

Journal of Risk & Insurance, 2008, vol. 75, issue 2, 365-386

Abstract: We consider the problem of determining appropriate solvency capital requirements for an insurance company or a financial institution. We demonstrate that the subadditivity condition that is often imposed on solvency capital principles can lead to the undesirable situation where the shortfall risk increases by a merger. We propose to complement the subadditivity condition by a regulator's condition. We find that for an explicitly specified confidence level, the Value‐at‐Risk satisfies the regulator's condition and is the “most efficient” capital requirement in the sense that it minimizes some reasonable cost function. Within the class of concave distortion risk measures, of which the elements, in contrast to the Value‐at‐Risk, exhibit the subadditivity property, we find that, again for an explicitly specified confidence level, the Tail‐Value‐at‐Risk is the optimal capital requirement satisfying the regulator's condition.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Downloads: (external link)
https://doi.org/10.1111/j.1539-6975.2008.00264.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:75:y:2008:i:2:p:365-386

Ordering information: This journal article can be ordered from
http://www.wiley.com/bw/subs.asp?ref=0022-4367

Access Statistics for this article

Journal of Risk & Insurance is currently edited by Joan T. Schmit

More articles in Journal of Risk & Insurance from The American Risk and Insurance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().