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Which eligible assets are compatible with comonotonic capital requirements?

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  • Koch-Medina, Pablo
  • Munari, Cosimo
  • Svindland, Gregor

Abstract

Within the context of capital adequacy, we study comonotonicity of risk measures in terms of the primitives of the theory: acceptance sets and eligible, or reference, assets. We show that comonotonicity cannot be characterized by the properties of the acceptance set alone and heavily depends on the choice of the eligible asset. In fact, in many important cases, comonotonicity is only compatible with risk-free eligible assets. The incompatibility with risky eligible assets is systematic whenever the acceptability criterion is based on Value-at-Risk or any convex distortion risk measure such as Expected Shortfall. These findings qualify and arguably call for a critical appraisal of the meaning and the role of comonotonicity within a capital adequacy context.

Suggested Citation

  • Koch-Medina, Pablo & Munari, Cosimo & Svindland, Gregor, 2018. "Which eligible assets are compatible with comonotonic capital requirements?," Insurance: Mathematics and Economics, Elsevier, vol. 81(C), pages 18-26.
    • Handle: RePEc:eee:insuma:v:81:y:2018:i:c:p:18-26
    DOI: 10.1016/j.insmatheco.2018.04.003
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    References listed on IDEAS

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    Cited by:

    1. Zheng, Yanting & Luan, Xin & Lu, Xin & Liu, Jiaming, 2023. "A new view of risk contagion by decomposition of dependence structure: Empirical analysis of Sino-US stock markets," International Review of Financial Analysis, Elsevier, vol. 90(C).
    2. Samuel Solgon Santos & Marcelo Brutti Righi & Eduardo de Oliveira Horta, 2022. "The limitations of comonotonic additive risk measures: a literature review," Papers 2212.13864, arXiv.org, revised Jan 2024.
    3. Martin Herdegen & Nazem Khan & Cosimo Munari, 2024. "Risk, utility and sensitivity to large losses," Papers 2405.12154, arXiv.org.

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