Risk Concentration and Diversification: Second-Order Properties
Risk Management
2009-12-19 v2 Probability
Abstract
The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today's risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit.
Keywords
Cite
@article{arxiv.0910.2367,
title = {Risk Concentration and Diversification: Second-Order Properties},
author = {Matthias Degen and Dominik D. Lambrigger and Johan Segers},
journal= {arXiv preprint arXiv:0910.2367},
year = {2009}
}
Comments
19 pages, 5 figures; status: submitted; references and introduction revised with more discussion on Basel II, Solvency II, and risk diversification