Optimal Capital Allocation Principles
نویسندگان
چکیده
Evaluating capital requirements as well as allocating total capital into various business units are becoming increasingly important part of the risk management process of a financial enterprise. In the allocation of capital, we consider the purpose of capital allocation within a company (individual, collective, or market-relative), the manner in which the portfolios within the conglomerate can possibly interact (pooled, partially pooled, or presence of firewalls), as well as the company’s attitude towards risk (risk aversion). In this paper, we examine some of the fundamental principles of fairly allocating the total capital when these considerations are taken into account. We are able to generalize allocation principles by a re-expression of the allocation issue as a distance optimization problem. No allocation formula is all-encompassing but these optimization criteria provide insights into the allocation process. *** This abstract has been prepared for the UNSW Actuarial Studies Research Symposium 2004.
منابع مشابه
An Analysis the Effect of Capital Taxation on Allocation of Resources: A Dynamic Equilibrium Model Approach
Abstract T he return of capital is fundamental to the intertemporal allocation of resources by changing the consumption behavior and capital accumulation over time. Taxation on return of capital increases the marginal product of capital, meaning that capital stock is lower than when capital is not taxed, which results decreased growth and welfare in steady state. This pape...
متن کاملAn application of capital allocation principles to operational risk and the cost of fraud
The costs of operational risk refer to the capital needed to cover the losses generated by a firm’s ordinary activities. In this paper several capital allocation principles are examined to demonstrate how such principles can be used to distribute aggregated capital across the various constituents that generate operational risk. Proportional allocation, for example, allows a cost per unit to be ...
متن کاملRisk Based Capital Allocation and Risk Adjusted Performance Management in Property/Liabilrty-Insurance: A Risk Theoretical Framework
Related to the current discussion of value-at-risk-based capital allocation and performance management (RAPM) for managing bank capital, a risk theoretical RAPM-approach for propertylliability-insurance companies is presented. The paper discusses several central issues of a RAPM-approach: Virtual risk adjusted capital (VRAC) on the company level, return on risk adjusted capital (RORAC), risk ba...
متن کاملGaps and Triangles
In this paper, we derive principles of optimal cyclical monetary policy in an economy without capital, with a cash-in-advance restriction on household transactions, and monopolistic firms that set prices one period in advance. The only distortionary policy instruments are the nominal interest rate and the money supply. In this environment it is feasible to undo both the cash-in-advance and pric...
متن کاملSuitability of Capital Allocations for Performance Measurement
Capital allocation principles are used in various contexts in which a risk capital or a cost of an aggregate position has to be allocated among its constituent parts. We study capital allocation principles in a performance measurement framework. We introduce the notation of suitability of allocations for performance measurement and show under different assumptions on the involved risk measures ...
متن کامل