Combining multi-asset and intrinsic risk measures

37 Pages Posted: 6 May 2021

See all articles by Christian Laudagé

Christian Laudagé

Fraunhofer ITWM - Department Financial Mathematics

Jörn Sass

University of Kaiserslautern - Department of Mathematics

Jörg Wenzel

Fraunhofer ITWM

Date Written: May 5, 2021

Abstract

The risk of a future payoff is commonly quantified by calculating the costs of a hedging portfolio such that the resulting position is acceptable, i.e. that it passes a capital adequacy test. A multi-asset risk measure describes the minimal external capital which has to be raised into multiple eligible assets to make a future risky position acceptable. Recently, the alternative methodology of intrinsic risk measures was introduced in the literature. These ask for the minimal proportion of the risky position which has to be reallocated to pass the capital adequacy test, i.e. only internal capital is used.
We combine these two concepts and call this new type of risk measure a multi-asset intrinsic risk measure. It allows to secure the risky position by external capital as well as reallocating liquid parts of the portfolio as an internal rebooking. We investigate several properties to demonstrate similarities and differences to the two aforementioned classical types of risk measures. We find that diversification reduces risk only under an additional but economically motivated assumption on the risky positions. With the help of Sion’s minimax theorem we also prove a dual representation for multi-asset intrinsic risk measures. Finally, we determine capital requirements in a model motivated by the Solvency II methodology.

Keywords: Intrinsic risk measure, multi-asset risk measure, multiple eligible assets, diversification, Value-at-Risk, Expected Shortfall, Solvency II

JEL Classification: C65, G11, G32

Suggested Citation

Laudagé, Christian and Sass, Jörn and Wenzel, Jörg, Combining multi-asset and intrinsic risk measures (May 5, 2021). Available at SSRN: https://ssrn.com/abstract=3840009 or http://dx.doi.org/10.2139/ssrn.3840009

Christian Laudagé (Contact Author)

Fraunhofer ITWM - Department Financial Mathematics ( email )

Fraunhofer-Platz 1
Kaiserslautern, 67663
Germany

Jörn Sass

University of Kaiserslautern - Department of Mathematics ( email )

D-67653 Kaiserslautern
Germany

Jörg Wenzel

Fraunhofer ITWM ( email )

Fraunhofer-Platz 1
Kaiserslautern, 67663
Germany

HOME PAGE: http://https://www.itwm.fraunhofer.de/de/abteilungen/fm.html

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