Risk allocation under liquidity constraints

Csóka, Péter and Herings, P. Jean-Jacques (2014) Risk allocation under liquidity constraints. Journal of Banking and Finance, 49. pp. 1-9. ISSN 0378-4266


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Abstract Risk allocation games are cooperative games that are used to attribute the risk of a financial entity to its divisions. In this paper, we extend the literature on risk allocation games by incorporating liquidity considerations. A liquidity policy specifies state-dependent liquidity requirements that a portfolio should obey. To comply with the liquidity policy, a financial entity may have to liquidate part of its assets, which is costly. The definition of a risk allocation game under liquidity constraints is not straightforward, since the presence of a liquidity policy leads to externalities. We argue that the standard worst case approach should not be used here and present an alternative definition. We show that the resulting class of transferable utility games coincides with the class of totally balanced games. It follows from our results that also when taking liquidity considerations into account there is always a stable way to allocate risk.

Item Type: Article
Uncontrolled Keywords: Totally balanced games; Risk capital allocation; Portfolio performance evaluation; Market liquidity; Coherent measures of risk; Market microstructure
Subjects: H Social Sciences / társadalomtudományok > HG Finance / pénzügy
H Social Sciences / társadalomtudományok > HG Finance / pénzügy > HG4 Stock market, exchange / tőzsde
Depositing User: MTMT SWORD
Date Deposited: 05 Apr 2016 13:41
Last Modified: 05 Apr 2016 13:41

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