### Abstract

Original language | English |
---|---|

Place of Publication | Tilburg |

Publisher | Operations research |

Number of pages | 38 |

Volume | 2010-123 |

Publication status | Published - 2010 |

### Publication series

Name | CentER Discussion Paper |
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Volume | 2010-123 |

### Fingerprint

### Keywords

- risk capital
- capital allocation
- excesses
- lexicographic minimum

### Cite this

*Excess Based Allocation of Risk Capital*. (CentER Discussion Paper; Vol. 2010-123). Tilburg: Operations research.

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**Excess Based Allocation of Risk Capital.** / van Gulick, G.; De Waegenaere, A.M.B.; Norde, H.W.

Research output: Working paper › Discussion paper › Other research output

TY - UNPB

T1 - Excess Based Allocation of Risk Capital

AU - van Gulick, G.

AU - De Waegenaere, A.M.B.

AU - Norde, H.W.

N1 - Subsequently published in Insurance: Mathematics and Economics (2012) Pagination: 38

PY - 2010

Y1 - 2010

N2 - 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 of that set of portfolios in excess of the amount of risk capital allocated to them. The underlying idea is that large excesses are undesirable, and therefore the goal is to determine the allocation for which the largest excess is as small as possible. We show that this allocation rule yields a unique allocation, and that it satisfies some desirable properties. We also show that the allocation can be determined by solving a series of linear programming problems.

AB - 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 of that set of portfolios in excess of the amount of risk capital allocated to them. The underlying idea is that large excesses are undesirable, and therefore the goal is to determine the allocation for which the largest excess is as small as possible. We show that this allocation rule yields a unique allocation, and that it satisfies some desirable properties. We also show that the allocation can be determined by solving a series of linear programming problems.

KW - risk capital

KW - capital allocation

KW - excesses

KW - lexicographic minimum

M3 - Discussion paper

VL - 2010-123

T3 - CentER Discussion Paper

BT - Excess Based Allocation of Risk Capital

PB - Operations research

CY - Tilburg

ER -