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Some properties of Euler capital allocation

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  • Lars Holden

Abstract

The paper discusses capital allocation using the Euler formula and focuses on the risk measures Value-at-Risk (VaR) and Expected shortfall (ES). Some new results connected to this capital allocation is known. Two examples illustrate that capital allocation with VaR is not monotonous which may be surprising since VaR is monotonous. A third example illustrates why the same risk measure should be used in capital allocation as in the evaluation of the total portfolio. We show how simulation may be used in order to estimate the expected Return on risk adjusted capital in the commitment period of an asset. Finally, we show how Markov chain Monte Carlo may be used in the estimation of the capital allocation.

Suggested Citation

  • Lars Holden, 2024. "Some properties of Euler capital allocation," Papers 2405.00606, arXiv.org.
    • Handle: RePEc:arx:papers:2405.00606
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    References listed on IDEAS

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    1. Fischer, T., 2003. "Risk capital allocation by coherent risk measures based on one-sided moments," Insurance: Mathematics and Economics, Elsevier, vol. 32(1), pages 135-146, February.
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    3. Carlo Acerbi & Dirk Tasche, 2002. "Expected Shortfall: A Natural Coherent Alternative to Value at Risk," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(2), pages 379-388, July.
    4. Dirk Tasche, 2005. "Measuring sectoral diversification in an asymptotic multi-factor framework," Papers physics/0505142, arXiv.org, revised Jul 2006.
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