Optimal capital allocation principles

Jan Dhaene, Andreas Tsanakas, Emiliano Valdez () and Steven Vanduffel ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops a unifying framework for allocating the aggregate capital of a financial firm to its business units. The approach relies on an optimisation argument, requiring that the weighted sum of measures for the deviations of the business unit’s losses from their respective allocated capitals be minimised. This enables the association of alternative allocation rules to specific decision criteria and thus provides the risk manager with flexibility to meet specific target objectives. The underlying general framework reproduces many capital allocation methods that have appeared in the literature and allows for several possible extensions. An application to an insurance market with policyholder protection is additionally provided as an illustration.

Keywords: Capital allocation; risk measure; comonotonicity; Euler allocation; default option; Lloyd’s of London (search for similar items in EconPapers)
JEL-codes: G00 G20 (search for similar items in EconPapers)
Date: 2009-01-23
New Economics Papers: this item is included in nep-cfn, nep-ias and nep-rmg
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Optimal Capital Allocation Principles (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13574

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