Portfolio risk allocation through Shapley value
Computational Finance
2021-03-10 v1 Computational Engineering, Finance, and Science
Econometrics
Optimization and Control
Abstract
We argue that using the Shapley value of cooperative game theory as the scheme for risk allocation among non-orthogonal risk factors is a natural way of interpreting the contribution made by each of such factors to overall portfolio risk. We discuss a Shapley value scheme for allocating risk to non-orthogonal greeks in a portfolio of derivatives. Such a situation arises, for example, when using a stochastic volatility model to capture option volatility smile. We also show that Shapley value allows for a natural method of interpreting components of enterprise risk measures such as VaR and ES. For all applications discussed, we derive explicit formulas and / or numerical algorithms to calculate the allocations.
Keywords
Cite
@article{arxiv.2103.05453,
title = {Portfolio risk allocation through Shapley value},
author = {Patrick S. Hagan and Andrew Lesniewski and Georgios E. Skoufis and Diana E. Woodward},
journal= {arXiv preprint arXiv:2103.05453},
year = {2021}
}
Comments
15 pages