Risk concentration and diversification: Second-order properties

By M. Degen, Dominik D. Lambrigger, Johan Segers. 2009

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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.

Subfields: Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/7b09a602abd5a501c87471c097fe44e08304b977