Asymptotics for Risk Capital Allocations Based on Conditional Tail Expectation

Abstract

An investigation of the limiting behavior of a risk capital allocation rule based on the Conditional Tail Expectation (CTE) risk measure is carried out. More specifically, with the help of general notions of Extreme Value Theory (EVT), the aforementioned risk capital allocation is shown to be asymptotically proportional to the corresponding Value-at- Risk (VaR) risk measure. The existing methodology acquired for VaR can therefore be applied to a somewhat less well-studied CTE. In the context of interest, the EVT approach is seemingly well-motivated by modern regulations, which openly strive for the excessive prudence in determining risk capitals.

Keywords: Asymptotic dependence and independence, Capital allocation, Conditional Tail Expectation, Extreme Value Theory, Heavytailed distributions, Value-at-Risk

JEL Classification: C10, C60