How should the cost of joint risk capital be allocated for performance measurement?

Homburg, Carsten; Scherpereel, Peter

doi:10.1016/j.ejor.2007.03.020

Cited by 35 publications

(11 citation statements)

References 21 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Therefore, the allocation schemes are suited for an ex-post perspective of the problem, allocating the cost of risk capital to the divisions for the purpose of performance measurement. The same holds for the work of Homburg & Scherpereel (2008), who analyze the fairness of various allocation schemes for the cost of risk capital.…”

Section: Relation To the Literaturementioning

confidence: 72%

Allocation of risk capital on an internal market

Baule¹

2014

European Journal of Operational Research

View full text Add to dashboard Cite

Section: Relation To the Literaturementioning

confidence: 72%

Allocation of risk capital on an internal market

Baule¹

2014

European Journal of Operational Research

View full text Add to dashboard Cite

“…Myers -Read 2001;Sherris 2006;Kim -Hardy 2007) or other statistical approaches (e.g. Kalkberener 2005; Homburg -Scherpereel 2008;Buch -Dorfleitner 2008). By contrast, little reference is made to issues of practical application, as Kim and Hardy (2007:23) writes, "capital allocation methodology has mainly been developed based on a list of axioms rather than on motivation and a little has been researched on how the given capital allocation can be used in light of its Studies Dóra Balog motivations."…”

Section: Dóra Balog Is a Phd Student Of The General And Quantitativementioning

confidence: 99%

“…In addition, the transparency and the relative simplicity of the allocation mechanism are also key criteria in practice. The experiment conducted by Homburg and Scherpereel (2008) using real economic actors underpinned the primary role of the above criteria in the course of practical application. The authors found that due to the limited rationality of real economic players, the perceived fairness of the distribution is more influenced by transparency, simplicity and the fulfilment of individual rationality by the allocation mechanism than the satisfaction of the most frequently analysed core compatibility.…”

Section: Studies Dóra Balogmentioning

confidence: 99%

Capital Allocation in the Insurance Sector

Balog¹

2017

Hitelintézeti szemle

View full text Add to dashboard Cite

“…Homburg and Scherpereel (2008) are also checking the average Core Compatibility of the Shapley value (among other rules), but in their setting Value at Risk is used (which is not a coherent measure of risk) and there are no liquidity constraints. In their paper for 3 and 4 divisions the average Core Compatibility of the Shapley value becomes 80-90%, but using Value at Risk the resulting game is not totally balanced, and hence that result says nothing about the other two fairness requirements.…”

Section: Introductionmentioning

confidence: 99%

“…Since the capital should be kept by the firm in riskless assets, dividing the returns of the divisions by the respective capital requirements can serve as a performance evaluation measure. Using coherent measures of risk the sum of the capital requirements of the divisions is larger than the capital requirement of the firm itself, there is some diversification benefit hat should be allocated somehow (for more details and applications see Denault (2001), Kalkbrener (2005), Buch and Dorfleitner (2008), Homburg and Scherpereel (2008), Kim andHardy (2009), andKóczy (2009) among others). Csóka and Herings (2014) extend the usual cooperative game theory approach (risk allocation games) to handle the problem of risk capital allocation when the divisions might have illiquid assets by combining the notions of Csóka, Herings, and Kóczy (2009) and Acerbi and Scandolo (2008).…”

Section: Introductionmentioning

confidence: 99%

Fair risk allocation in illiquid markets

Csóka

2017

Finance Research Letters

View full text Add to dashboard Cite

Let us consider a financially constrained leveraged financial firm having some divisions which have invested into some risky assets. Using coherent measures of risk the sum of the capital requirements of the divisions is larger than the capital requirement of the firm itself, there is some diversification benefit that should be allocated somehow for proper performance evaluation of the divisions. In this paper we use cooperative game theory and simulation to assess the possibility to jointly satisfy three natural fairness requirements for allocating risk capital in illiquid markets: Core Compatibility, Equal Treatment Property and Strong Monotonicity.Core Compatibility can be viewed as the allocated risk to each coalition (subset) of divisions should be at least as much as the risk increment the coalition causes by joining the rest of the divisions. Equal Treatment Property guarantees that if two divisions have the same standalone risk and also they contribute the same risk to all the subsets of divisions not containing them, then the same risk capital should be allocated to them. Strong Monotonicity requires that if a division weakly reduces its stand-alone risk and also its risk contribution to all the subsets of the other divisions, then as an incentive its allocated risk capital should not increase. Analyzing the simulation results we conclude that in most of the cases it is not possible to allocate risk in illiquid markets satisfying the three fairness notions at the same time, one has to give up at least one of them. A magbeliség követelménye az, hogy a divíziók tetszőleges koalíciójára (részhalmazára) legalább annyi kockázatot allokáljunk, mint amekkora kockázatnövekedést okoz az, ha a koalíció csatlakozik a többi divízióhoz. Az egyenlően kezelés tulajdonság azt garantálja, hogy ha két divízió annyira szimmetrikus, hogy ugyanaz a kockázatuk és a divíziók összes, őket nem tartalmazó koalíciójához is ugyanakkora kockázattal járulnak hozzá, akkor ugyanannyi kockázatot kell rájuk osztani. Az erős monotonitás azt követeli meg, hogy ha egy divízió gyengén csökkenti az egyéni kockázatát és a többi divízió tetszőleges koalíciójához is kevesebb kockázatot tesz hozzá, akkor (ösztönzésképpen) a ráosztott tőke nem növekedhet. A szimulációs eredményeket elemezve arra a végkövetkeztetésre jutunk, hogy a legtöbb esetben nem likvid piacokon nem lehetséges a három igazságossági követelményt egyszerre teljesíteni, valamelyikről le kell mondanunk.Tárgyszavak: piaci mikrostruktúra, koherens kockázati mértékek, piaci likviditás, finanszírozási likviditás, portfólióteljesítmény-értékelés, tőkeallokáció, teljesen kiegyensúlyozott játékok, szimuláció JEL kód: C71, G10Fair risk allocation in illiquid markets * Péter Csóka † January 19, 2015 AbstractLet us consider a financially constrained leveraged financial firm having some divisions which have invested into some risky assets. Using coherent measures of risk the sum of the capital requirements of the divisions is larger than the capital requirement of the firm itself, t...

show abstract

How should the cost of joint risk capital be allocated for performance measurement?

Cited by 35 publications

References 21 publications

Allocation of risk capital on an internal market

Allocation of risk capital on an internal market

Capital Allocation in the Insurance Sector

Fair risk allocation in illiquid markets

Contact Info

Product

Resources

About