Suitability of Capital Allocations for Performance Measurement

28 Pages Posted: 9 Jun 2016

See all articles by Eduard Kromer

Eduard Kromer

University of California, Berkeley

Ludger Overbeck

University of Giessen

Date Written: August 29, 2014

Abstract

Capital allocation principles are used in various contexts in which the risk capital or the cost of an aggregate position has to be allocated between its constituent parts. We study capital allocation principles in a performance measurement framework. We introduce the notation of suitability of allocations for performance measurement and show under different assumptions on the involved reward and risk measures that there exist suitable allocation methods. The existence of certain suitable allocation principles is generally given under rather strict assumptions on the underlying risk measure. Therefore we show, with a reformulated definition of suitability and in a slightly modified setting, that there is a known suitable allocation principle that does not require any properties of the underlying risk measure. Additionally, we extend a previous characterization result from the literature from a mean–risk to a reward–risk setting. Formulations of this theory are also possible in a game-theoretic setting.

Keywords: capital allocations, performance measurement

Suggested Citation

Kromer, Eduard and Overbeck, Ludger, Suitability of Capital Allocations for Performance Measurement (August 29, 2014). Journal of Risk, Vol. 16, No. 6, 2014, Available at SSRN: https://ssrn.com/abstract=2791430

Eduard Kromer (Contact Author)

University of California, Berkeley ( email )

Evans Hall
Berkeley, CA 3860 94720
United States

Ludger Overbeck

University of Giessen ( email )

Institut of Mathematics
Giessen, 35394
Germany

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