Inf-convolution, Optimal Allocations, and Model Uncertainty for Tail Risk Measures
Mathematics of Operations Research, forthcoming
44 Pages Posted: 5 Dec 2019 Last revised: 18 Jan 2022
Date Written: November 19, 2019
Inspired by the recent developments in risk sharing problems for the Value-at-Risk (VaR), the Expected Shortfall (ES), or the Range-Value-at-Risk (RVaR), we study the optimization of risk sharing for general tail risk measures. Explicit formulas of the inf-convolution and Pareto-optimal allocations are obtained in the case of a mixed collection of left and right VaRs, and in that of a VaR and another tail risk measure. The inf-convolution of tail risk measures is shown to be a tail risk measure with an aggregated tail parameter, a phenomenon very similar to the cases of VaR , ES and RVaR. Optimal allocations are obtained in the setting of elliptical models,
and several results are established for tail risk measures and risk sharing problems in the presence of model uncertainty. The technical conclusions are quite general without assuming any form of convexity of the tail risk measures. Our analysis generalizes in several directions the recent literature on quantile-based risk sharing.
Keywords: Risk sharing, Pareto optimality, Value-at-Risk, Range-Value-at-Risk, Non-convex optimization
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