The Impact of Systemic Risk on the Diversification Benefits of a Risk Portfolio

Marc Busse (), Michel Dacorogna and Marie Kratz ()
Additional contact information
Marc Busse: SCOR Switzerland, Postal: General Guisan Quai 26, ZURICH, 8022, SWITZERLAND,, http://www.SCOR.com
Marie Kratz: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE Cedex, FRANCE, http://www.essec.edu

No WP1321, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: Risk diversification is the basis of insurance and investment. It is thus crucial to study the effects that could limit it. One of them is the existence of systemic risk that affects all the policies at the same time. We introduce here a probabilistic approach to examine the consequences of its presence on the risk loading of the premium of a portfolio of insurance policies. This approach could be easily generalized for investment risk. We see that, even with a small probability of occurrence, systemic risk can reduce dramatically the diversification benefits. It is clearly revealed via a non-diversifiable term that appears in the analytical expression of the variance of our models. We propose two ways of introducing it and discuss their advantages and limitations. By using both VaR and TVaR to compute the loading, we see that only the latter captures the full effect of systemic risk when its probability to occur is low.

Keywords: diversification; expected shortfall; investment risk; premium; risk loading; risk measure; risk management; risk portfolio; stochastic model; systemic risk; value-at-risk (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 G22 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2013-12
New Economics Papers: this item is included in nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hal-essec.archives-ouvertes.fr/docs/00/91/48/44/PDF/WP1321.pdf (application/pdf)

Related works:
Journal Article: The Impact of Systemic Risk on the Diversification Benefits of a Risk Portfolio (2014)
Working Paper: The impact of systemic risk on the diversification benefits of a risk portfolio (2013)
Working Paper: The Impact of Systemic Risk on the Diversification Benefits of a Risk Portfolio (2013)
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:ebg:essewp:dr-13021

Access Statistics for this paper

More papers in ESSEC Working Papers from ESSEC Research Center, ESSEC Business School ESSEC Research Center, BP 105, 95021 Cergy, France. Contact information at EDIRC.
Bibliographic data for series maintained by Sophie Magnanou ().