Abstract
This paper proposes an integrated approach of measuring risk and the associated cost. The model is developed from the simple practical example of a bond spread and then generalized. This leads to a class which encompasses spectral risk measures and hence includes the popular measures Value at Risk and Tail Value at Risk and under certain conditions is coherent. The defining equations lead to a “natural” decomposition by sub portfolio under practical conditions. In an application section market data is used to parametrize the measure and evaluate the capital cost of an example company.
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Notes
Typically it is one year as for instance in the Solvency II framework.
The applicable condition is X ≥ Y in the case of result distribution and X ≤ Y on claims distributions.
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Baier, A. An integrated Cost of Risk model and its application to company valuation. Eur. Actuar. J. 1 (Suppl 2), 169–184 (2011). https://doi.org/10.1007/s13385-011-0018-0
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DOI: https://doi.org/10.1007/s13385-011-0018-0