Abstract | ||
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We incorporate a notion of risk aversion favoring prudent decisions from financial institutions into regulatory capital calculation principles. In the context of Basel III and IV as well as Solvency II, regulatory capital calculation is carried out through the tools of monetary risk measures. The notion of risk aversion that we focus on has four equivalent formulations: through consistency with second-order stochastic dominance, conditional expectations, or portfolio diversification, and through expected social impact. The class of monetary risk measures representing this notion of risk aversion is referred to as consistent risk measures. We characterize the class of consistent risk measures by establishing an Expected Shortfall (ES)-based representation, and as a by-product, we obtain new results on the representation of convex risk measures. We present several examples where consistent risk measures naturally appear. Using the obtained representation results, we study risk sharing and optimal investment problems and find several new analytical solutions. |
Year | DOI | Venue |
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2020 | 10.1137/18M121842X | SIAM JOURNAL ON FINANCIAL MATHEMATICS |
Keywords | DocType | Volume |
regulatory capital,risk measures,risk aversion,risk sharing,stochastic dominance | Journal | 11 |
Issue | ISSN | Citations |
1 | 1945-497X | 0 |
PageRank | References | Authors |
0.34 | 0 | 2 |
Name | Order | Citations | PageRank |
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Tiantian Mao | 1 | 0 | 2.03 |
Ruodu Wang | 2 | 47 | 11.75 |