Cost gap, Shapley, or nucleolus allocation: Which is the best game‐theoretic remedy for the low‐risk anomaly?

Benjamin R. Auer and Tobias Hiller

Managerial and Decision Economics, 2021, vol. 42, issue 4, 876-884

Abstract: Empirical research in investment management has discovered the puzzling phenomenon that, contrary to established capital market theory, low‐risk assets tend to earn larger returns than their high‐risk counterparts. In a recent contribution, Auer and Hiller (2019) emphasize that an inadequate quantification of risk may be the root of this problem. By interpreting a portfolio as a cooperative game, they arrive at the interesting finding that using assets' risk‐based Shapley values instead of classic stand‐alone risk measures has the potential to solve the low‐risk puzzle. In this article, we extend their study first by considering additional game‐theoretic risk allocation schemes, namely, the cost gap technique and the nucleolus method, and then by improving their simulation design via a larger number of assets and a supplementary determination of risk–return slopes. We find that the Shapley method outperforms the alternatives with respect to the generation of positive risk–return slopes.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1002/mde.3279

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:wly:mgtdec:v:42:y:2021:i:4:p:876-884

Access Statistics for this article

Managerial and Decision Economics is currently edited by Antony Dnes

More articles in Managerial and Decision Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().