A capital allocation scheme for a company that has a random total profit Y and uses a coherent risk measure ρ has been suggested. The scheme returns a unique real number Λρ*(X,Y), which determines the capital that should be allocated to company’s subsidiary with random profit X. The...

In this paper we propose a new rule to allocate risk capital to portfolios or divisions within a firm. Specifically, we determine the capital allocation that minimizes the excesses of sets of portfolios in a lexicographical sense. The excess of a set of portfolios is defined as the expected loss...

Abstract: This paper analyzes risk capital allocation problems. For risk capital allocation problems, the aim is to allocate the risk capital of a firm to its divisions. Risk capital allocation is of central importance in risk-based performance measurement. We consider a case in which the...

In this paper we propose a new rule to allocate risk capital to portfolios or divisions within a firm. Specifically, we determine the capital allocation that minimizes the excesses of sets of portfolios in lexicographical sense. The excess of a set of portfolios is defined as the expected loss...

In today's financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should...

This Selected Issues paper discusses the impact of global financial turmoil on Japan. It describes how close integration in global financial markets has deepened and expanded the channels for spillovers. The paper discusses options for increasing the consumption tax to finance the public pension...

Although portfolio management didn’t change much during the 40 years after the seminal works of Markowitz and Sharpe, the development of risk budgeting techniques marked an important milestone in the deepening of the relationship between risk and asset management. Risk parity then became a...

This paper presents a dynamic portfolio credit model following the regulatory framework, using macroeconomic and latent risk factors to predict the aggregate loan portfolio loss in a banking system. The latent risk factors have three levels: global across the entire banking system,...

Calculation of risk contributions of sub-portfolios to total portfolio risk is essential for risk management in insurance companies. Thanks to risk capital allocation methods and linearity of the loss model, sub-portfolio (or position) contributions can be calculated efficiently. However, factor...

This paper examines the overall risks in Chinese copper, rubber, and soybean futures markets using a copula-VaR (value at risk) and copula-ES (expected shortfall) framework that explicitly accounts for both trading and non-trading information. Our results show that information accumulating...