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

43 Pages Posted: 5 Nov 2017

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

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Date Written: December 2017

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 risk exposures that are shared and dependent across an intricate corporate structure. This article 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 multiperiod 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.

Suggested Citation

Ai, Jing and Brockett, Patrick L. and Wang, Tianyang, Optimal Enterprise Risk Management and Decision Making with Shared and Dependent Risks (December 2017). Journal of Risk and Insurance, Vol. 84, Issue 4, pp. 1127-1169, 2017. Available at SSRN: https://ssrn.com/abstract=3064370 or http://dx.doi.org/10.1111/jori.12140

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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