On the Impossibility of Fair Risk Allocation

Péter Csóka and Pintér Miklós ()
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Pintér Miklós: Department of Mathematics, Corvinus University of Budapest and MTA-BCE “Lendület” Strategic Interactions Research Group, Budapest, Hungary Faculty of Business and Economics, University of Pécs, Pécs, Hungary

The B.E. Journal of Theoretical Economics, 2016, vol. 16, issue 1, 143-158

Abstract: Allocating risk properly to subunits is crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. We show that by using coherent measures of risk it is impossible to allocate risk satisfying simultaneously the natural game theoretical requirements of Core Compatibility and Strong Monotonicity. To obtain the result we characterize the Shapley value on the class of totally balanced games and also on the class of exact games as being the only risk allocation method satisfying Strong Monotonicity, Equal Treatment Property and Efficiency. Moreover, we clarify and interpret the related game theoretical requirements that have appeared in the literature so far and have been applied to risk allocation.

Keywords: coherent measures of risk; risk allocation games; totally balanced games; exact games; shapley value; core (search for similar items in EconPapers)
JEL-codes: C71 G10 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: On the impossibility of fair risk allocation (2014)
Working Paper: On the Impossibility of Fair Risk Allocation (2011)
Working Paper: On the impossibility of fair risk allocation (2010)
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DOI: 10.1515/bejte-2014-0051

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