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Can a Coherent Risk Measure Be Too Subadditive?
Author(s) -
Dhaene J.,
Laeven R. J. A.,
Vanduffel S.,
Darkiewicz G.,
Goovaerts M. J.
Publication year - 2008
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2008.00264.x
Subject(s) - subadditivity , capital requirement , solvency , solvency ratio , capital (architecture) , regulator , risk measure , value at risk , economic capital , economics , econometrics , actuarial science , mathematics , risk management , microeconomics , financial economics , finance , incentive , discrete mathematics , gene , biochemistry , chemistry , archaeology , market liquidity , history , portfolio , profit (economics)
We consider the problem of determining appropriate solvency capital requirements for an insurance company or a financial institution. We demonstrate that the subadditivity condition that is often imposed on solvency capital principles can lead to the undesirable situation where the shortfall risk increases by a merger. We propose to complement the subadditivity condition by a regulator's condition . We find that for an explicitly specified confidence level, the Value‐at‐Risk satisfies the regulator's condition and is the “most efficient” capital requirement in the sense that it minimizes some reasonable cost function. Within the class of concave distortion risk measures, of which the elements, in contrast to the Value‐at‐Risk, exhibit the subadditivity property, we find that, again for an explicitly specified confidence level, the Tail‐Value‐at‐Risk is the optimal capital requirement satisfying the regulator's condition.