Fair risk allocation in illiquid markets

Péter Csóka

Finance Research Letters, 2017, vol. 21, issue C, 228-234

Abstract: Let us consider a financial firm having some divisions which have invested into some risky assets. Using coherent measures of risk there is some diversification benefit that should be allocated somehow. We use cooperative game theory and simulations to assess the possibility to jointly satisfy three inherent fairness requirements for allocating risk capital in illiquid markets: Core Compatibility, Equal Treatment Property, and Strong Monotonicity. We show that practically it is not possible to allocate risk in illiquid markets satisfying the three fairness notions at the same time, one has to give up at least one of them.

Keywords: Market microstructure; Coherent measures of risk; Portfolio performance evaluation; Risk capital allocation; Cooperative game theory (search for similar items in EconPapers)
JEL-codes: C71 G10 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Fair risk allocation in illiquid markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:21:y:2017:i:c:p:228-234

DOI: 10.1016/j.frl.2016.11.007

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