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Can cooperative game theory solve the low‐risk puzzle?

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  • Benjamin R. Auer
  • Tobias Hiller

Abstract

In this article, we illustrate that cooperative game theory may have the potential to solve the low‐risk puzzle, which has become one of the most important in modern finance because its implication of a negative risk‐return trade‐off poses a challenge to traditional models of asset prices. Using several simulation settings, we highlight that quantifying risk by means of assets' Shapley values, that is, assets' contributions to overall portfolio risk, instead of classic measures supplies a (more) positive risk‐return relationship in many practically relevant cases. This is partially attributable to the fact that the game‐theoretic risk measure captures more investment‐relevant information than commonly used alternatives.

Suggested Citation

  • Benjamin R. Auer & Tobias Hiller, 2019. "Can cooperative game theory solve the low‐risk puzzle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(2), pages 884-889, April.
    • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:2:p:884-889
    DOI: 10.1002/ijfe.1696
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    Cited by:

    1. Benjamin R. Auer & Tobias Hiller, 2021. "Cost gap, Shapley, or nucleolus allocation: Which is the best game‐theoretic remedy for the low‐risk anomaly?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 876-884, June.
    2. Tobias Hiller, 2022. "Allocation of portfolio risk and outside options," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(7), pages 2845-2848, October.
    3. Yezhou Sha & Ziwen Bu & Zilong Wang, 2023. "What drives the distress risk–return puzzle? A perspective on limits of arbitrage," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 3574-3592, October.

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