Coherent Measures of Risk from a General Equilibrium Perspective

23 Pages Posted: 28 May 2011

See all articles by P. Jean-Jacques Herings

P. Jean-Jacques Herings

Maastricht University

Péter Csóka

Corvinus University of Budapest; Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS)

Laszlo A. Koczy

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS); Quantitative Social and Management Sciences Research Group, Budapest University of Technology and Economics

Date Written: March 28, 2006

Abstract

Coherent measures of risk defined by the axioms of monotonicity, subadditivity, positive homogeneity, and translation invariance are recent tools in risk management to assess the amount of risk agents are exposed to. If they also satisfy law invariance and comonotonic additivity, then we get a subclass of them: spectral measures of risk. Expected shortfall is a well-known spectral measure of risk is. We investigate the above mentioned six axioms using tools from general equilibrium (GE) theory. Coherent and spectral measures of risk are compared to the natural measure of risk derived from an exchange economy model, that we call GE measure of risk. We prove that GE measures of risk are coherent measures of risk. We also show that spectral measures of risk can be represented by GE measures of risk only under stringent conditions, since spectral measures of risk do not take the regulated entity’s relation to the market portfolio into account. To give more insights, we characterize the set of GE measures of risk.

Keywords: Coherent Measures of Risk, General Equilibrium Theory, Exchange Economies, Asset Pricing

JEL Classification: D51, G10, G12

Suggested Citation

Herings, P. Jean-Jacques and Csóka, Péter and Koczy, Laszlo A., Coherent Measures of Risk from a General Equilibrium Perspective (March 28, 2006). Available at SSRN: https://ssrn.com/abstract=1853573 or http://dx.doi.org/10.2139/ssrn.1853573

P. Jean-Jacques Herings (Contact Author)

Maastricht University ( email )

Department of Economics
P.O. Box 616
6200 MD Maastricht
Netherlands
+31 43 3883636 (Phone)
+31 43 3884878 (Fax)

HOME PAGE: http://www.personeel.unimaas.nl/p.herings/herings.htm

Péter Csóka

Corvinus University of Budapest ( email )

Fővám tér 8.
Budapest, 1093
Hungary

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS) ( email )

Tóth Kálmán utca 4.
Budapest, 1097
Hungary

Laszlo A. Koczy

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS) ( email )

Budaörsi 45
Budapest, H-1112
Hungary

HOME PAGE: http://www.mtakti.hu/en/kutatok/laszlo-a-koczy/276/

Quantitative Social and Management Sciences Research Group, Budapest University of Technology and Economics ( email )

Magyar Tudósok krt. 2.
Budapest, 1117
Hungary

HOME PAGE: http://qsms.mokk.bme.hu/index.php/koczy/

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