Journal article

Publication year: 2014

Pages: 31-58

Journal: Journal of Risk

Volume number: 16

Issue number: 6

ISSN: 1465-1211

eISSN: 1755-2842

Open access status: Green

DOI Link: https://doi.org/10.21314/JOR.2014.280

Publisher: Infopro Digital Services

Abstract: 
Capital allocation principles are used in various contexts in which the risk capital or the cost of an aggregate position has to be allocated between its constituent parts. We study capital allocation principles in a performance measurement framework. We introduce the notation of suitability of allocations for performance measurement and show under different assumptions on the involved reward and risk measures that there exist suitable allocation methods. The existence of certain suitable allocation principles is generally given under rather strict assumptions on the underlying risk measure. Therefore we show, with a reformulated definition of suitability and in a slightly modified setting, that there is a known suitable allocation principle that does not require any properties of the underlying risk measure. Additionally, we extend a previous characterization result from the literature from a mean-risk to a reward-risk setting. Formulations of this theory are also possible in a game-theoretic setting.

Harvard Citation style: Kromer, E. and Overbeck, L. (2014) Suitability of capital allocations for performance measurement, Journal of Risk, 16(6), pp. 31-58. https://doi.org/10.21314/JOR.2014.280

APA Citation style: Kromer, E., & Overbeck, L. (2014). Suitability of capital allocations for performance measurement. Journal of Risk. 16(6), 31-58. https://doi.org/10.21314/JOR.2014.280