A note on representation of BSDE-based dynamic risk measures and dynamic capital allocations

Lesedi Mabitsela, Calisto Guambe and Rodwell Kufakunesu

Communications in Statistics - Theory and Methods, 2022, vol. 51, issue 6, 1791-1810

Abstract: We derive a representation for dynamic capital allocation when the underlying asset price process includes extreme random price movements. Moreover, we consider the representation of dynamic risk measures defined under Backward Stochastic Differential Equations (BSDE) with generators that grow quadratic-exponentially in the control variables. Dynamic capital allocation is derived from the differentiability of BSDEs with jumps. The results are illustrated by deriving a capital allocation representation for dynamic entropic risk measure and static coherent risk measure.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:taf:lstaxx:v:51:y:2022:i:6:p:1791-1810

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DOI: 10.1080/03610926.2020.1768405

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