Risk Concentration and Diversification: Second-Order Properties

Details Risk Concentration and Diversification: Second-Order Properties Risk Concentration and Diversification: Second-Order Properties

2009-10-13

arxiv.org/abs/0910.2367v2

Economy

Quantitative Finance

Risk Management

19 pages, 5 figures; status: submitted; references and introduction revised with more discussion on Basel II, Solvency II, and

Scientific paper

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.

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