Stable allocations of risk

The measurement and the allocation of risk are fundamental problems of portfolio management. Coherent measures of risk provide an axiomatic approach to the former problem. In an environment given by a coherent measure of risk and the various portfolios' realization vectors, risk allocation game...

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Bibliographic Details
Published in:Games and economic behavior 2009-09, Vol.67 (1), p.266-276
Main Authors: Csóka, Péter, Herings, P. Jean-Jacques, Kóczy, László Á.
Format: Article
Language:English
Subjects:
Allocations
Coherent measures of risk
Coherent measures of risk Risk allocation games Totally balanced games Exact games
Cooperation
Diversification
Exact games
Game theory
Measurement
Portfolio management
Responsibility
Risk
Risk allocation games
Studies
Totally balanced games
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Summary:The measurement and the allocation of risk are fundamental problems of portfolio management. Coherent measures of risk provide an axiomatic approach to the former problem. In an environment given by a coherent measure of risk and the various portfolios' realization vectors, risk allocation games aim at solving the second problem: How to distribute the diversification benefits of the various portfolios? Understanding these cooperative games helps us to find stable, efficient, and fair allocations of risk. We show that the class of risk allocation and totally balanced games coincide, hence a stable allocation of risk is always possible. When the aggregate portfolio is riskless, the class of risk allocation games coincides with the class of exact games. As in exact games any subcoalition may be subject to marginalization even in core allocations, our result further emphasizes the responsibility involved in allocating risk.
ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2008.11.001