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CAPITAL ALLOCATION AND RISK CONTRIBUTION WITH DISCRETE‐TIME COHERENT RISK
Author(s) -
Cherny Alexander S.
Publication year - 2009
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.2008.00355.x
Subject(s) - mathematical proof , coherent risk measure , capital allocation line , probabilistic logic , generator (circuit theory) , mathematical economics , econometrics , discrete time and continuous time , actuarial science , capital (architecture) , economics , risk management , computer science , value at risk , mathematics , finance , statistics , microeconomics , artificial intelligence , geography , profit (economics) , power (physics) , physics , geometry , archaeology , quantum mechanics
We define the capital allocation and the risk contribution for discrete‐time coherent risk measures and provide several equivalent representations of these objects. The formulations and the proofs are based on two instruments introduced in the paper: a probabilistic notion of the extreme system and a geometric notion of the generator . These notions are also of interest on their own and are important for other applications of coherent risk measures. All the concepts and results are illustrated by JP Morgan's Risk Metrics model.