Risk Measures and Efficient use of Capital 1

Philippe Artzner, Freddy Delbaen and Pablo Koch-Medina

ASTIN Bulletin, 2009, vol. 39, issue 1, 101-116

Abstract: This paper is concerned with clarifying the link between risk measurement and capital efficiency. For this purpose we introduce risk measurement as the minimum cost of making a position acceptable by adding an optimal combination of multiple eligible assets. Under certain assumptions, it is shown that these risk measures have properties similar to those of coherent risk measures. The motivation for this paper was the study of a multi-currency setting where it is natural to use simultaneously a domestic and a foreign asset as investment vehicles to inject the capital necessary to make an unacceptable position acceptable. We also study what happens when one changes the unit of account from domestic to foreign currency and are led to the notion of compatibility of risk measures. In addition, we aim to clarify terminology in the field.

Date: 2009
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