Optimal Enterprise Risk Management and Decision Making with Shared and Dependent Risks

46 Pages Posted: 12 Nov 2013

See all articles by Jing Ai

Jing Ai

University of Hawaii at Manoa - Shidler College of Business

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2013

Abstract

Dynamic enterprise risk management (ERM) entails holistic decision-making for critical corporate functions such as capital budgeting and risk management. The interplay across business divisions, however, is complicated due to their natural interactions through the shared and dependent risk exposures within an intricate corporate structure. This paper develops an integrated optimization framework via a copula-based decision tree interface to facilitate ERM decision making to meet the specified enterprise goal in a multi-period setting. We illustrate our model and provide managerial insights with a case study for a financial services company engaged in both banking and insurance businesses.

Keywords: Enterprise Risk Management(ERM), Capital Budgeting, Risk Dependency, Copula Modeling, Decisions under Uncertainty

Suggested Citation

Ai, Jing and Brockett, Patrick L. and Wang, Tianyang, Optimal Enterprise Risk Management and Decision Making with Shared and Dependent Risks (November 7, 2013). Available at SSRN: https://ssrn.com/abstract=2352485 or http://dx.doi.org/10.2139/ssrn.2352485

Jing Ai (Contact Author)

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States

Tianyang Wang

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

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