Optimal Capital Allocation Principles

Journal of Risk and Insurance - Tập 79 Số 1 - Trang 1-28 - 2012
Jan Dhaene1, Andreas Tsanakas2, Emiliano A. Valdez3, Steven Vanduffel4
1Faculty of Business and Economics, Katholieke Universiteit Leuven, Belgium
2Andreas Tsanakas is at the Cass Business School, City University
3Emiliano A. Valdez is at the Department of Mathematics, University of Connecticut
4Steven Vanduffel is at the Department of Economics and Political Science, Vrije Universiteit Brussel (VUB). An early draft of this article was presented at the 9th International Congress on Insurance: Mathematics and Economics (IME2005) in Laval, Quebec, Canada.

Tóm tắt

AbstractThis article develops a unifying framework for allocating the aggregate capital of a financial firm to its business units. The approach relies on an optimization argument, requiring that the weighted sum of measures for the deviations of the business unit's losses from their respective allocated capitals be minimized. The approach is fair insofar as it requires capital to be close to the risk that necessitates holding it. The approach is additionally very flexible in the sense that different forms of the objective function can reflect alternative definitions of corporate risk tolerance. Owing to this flexibility, the general framework reproduces several capital allocation methods that appear in the literature and allows for alternative interpretations and possible extensions.

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Thông tin xuất bản

Journal of Risk and Insurance

Tập 79 Số 1

1-28

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