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Fair risk allocation in illiquid markets

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  • Csóka, Péter

Abstract

Let us consider a financial firm having some divisions which have invested into some risky assets. Using coherent measures of risk there is some diversification benefit that should be allocated somehow. We use cooperative game theory and simulations to assess the possibility to jointly satisfy three inherent fairness requirements for allocating risk capital in illiquid markets: Core Compatibility, Equal Treatment Property, and Strong Monotonicity. We show that practically it is not possible to allocate risk in illiquid markets satisfying the three fairness notions at the same time, one has to give up at least one of them.

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  • Csóka, Péter, 2017. "Fair risk allocation in illiquid markets," Finance Research Letters, Elsevier, vol. 21(C), pages 228-234.
    • Handle: RePEc:eee:finlet:v:21:y:2017:i:c:p:228-234
    DOI: 10.1016/j.frl.2016.11.007
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    Cited by:

    1. Csóka, Péter & Hevér, Judit, 2018. "Portfolio valuation under liquidity constraints with permanent price impact," Finance Research Letters, Elsevier, vol. 26(C), pages 235-241.
    2. Lim, Hanah, 2022. "Benefit attribution in financial systems with bilateral netting," Finance Research Letters, Elsevier, vol. 45(C).
    3. Hevér, Judit, 2020. "A piaci likviditás és a szabályozás kapcsolatának vizsgálata általános egyensúlyelméleti modellkeretben [The effect of regulation on market liquidity: a general equilibrium approach]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 708-733.

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    More about this item

    Keywords

    Market microstructure; Coherent measures of risk; Portfolio performance evaluation; Risk capital allocation; Cooperative game theory;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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