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Can cooperative game theory solve the low‐risk puzzle?
Author(s) -
Auer Benjamin R.,
Hiller Tobias
Publication year - 2019
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1696
Subject(s) - economics , modern portfolio theory , portfolio , risk–return spectrum , asset (computer security) , game theory , capital asset pricing model , financial economics , microeconomics , computer science , computer security
In this article, we illustrate that cooperative game theory may have the potential to solve the low‐risk puzzle, which has become one of the most important in modern finance because its implication of a negative risk‐return trade‐off poses a challenge to traditional models of asset prices. Using several simulation settings, we highlight that quantifying risk by means of assets' Shapley values, that is, assets' contributions to overall portfolio risk, instead of classic measures supplies a (more) positive risk‐return relationship in many practically relevant cases. This is partially attributable to the fact that the game‐theoretic risk measure captures more investment‐relevant information than commonly used alternatives.