Risk contribution and its application in asset and risk management for life insurance
Abstract: In risk management one important aspect is the allocation of total portfolio risk into its components. This can be done by measuring each components' risk contribution relative to the total risk, taking into account the covariance between components. The measurement procedure is straightforward under assumptions of elliptical distributions but not under the commonly used multivariate log-normal distributions. Two portfolio strategies are considered, the "buy and hold" and the "constant mix" strategy. The profits and losses of the components of a generic portfolio strategy are defined in order to enable a proper definition of risk contribution for the constant mix strategy. Then kernel estimation of risk contribution is performed for both portfolio strategies using Monte Carlo simulation. Further, applications for asset and risk management with risk contributions are discussed in the context of life insurance.
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