Risk Allocation Under Liquidity Constraints

21 Pages Posted: 9 Oct 2013

See all articles by Péter Csóka

Péter Csóka

Corvinus University of Budapest; Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS)

P. Jean-Jacques Herings

Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 2013

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 straight-forward, 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.

Keywords: Market Microstructure, Coherent Measures of Risk, Market Liquidity, Portfolio Performance Evaluation, Risk Capital Allocation, Totally Balanced Games

JEL Classification: C71, G10

Suggested Citation

Csóka, Péter and Herings, P. Jean-Jacques, Risk Allocation Under Liquidity Constraints (September 9, 2013). Available at SSRN: https://ssrn.com/abstract=2337562 or http://dx.doi.org/10.2139/ssrn.2337562

Péter Csóka

Corvinus University of Budapest ( email )

Fővám tér 8.
Budapest, 1093
Hungary

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS) ( email )

Tóth Kálmán utca 4.
Budapest, 1097
Hungary

P. Jean-Jacques Herings (Contact Author)

Tilburg University ( email )

Department of Econometrics and Operations Research
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4668797 (Phone)
5000 LE (Fax)

HOME PAGE: http://https://sites.google.com/view/jean-jacques-herings/home

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