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Capital Allocation (capital + allocation)
Selected AbstractsCAPITAL ALLOCATION AND RISK CONTRIBUTION WITH DISCRETE-TIME COHERENT RISKMATHEMATICAL FINANCE, Issue 1 2009Alexander S. Cherny We define the capital allocation and the risk contribution for discrete-time coherent risk measures and provide several equivalent representations of these objects. The formulations and the proofs are based on two instruments introduced in the paper: a probabilistic notion of the extreme system and a geometric notion of the generator. These notions are also of interest on their own and are important for other applications of coherent risk measures. All the concepts and results are illustrated by JP Morgan's Risk Metrics model. [source] AN AXIOMATIC APPROACH TO CAPITAL ALLOCATIONMATHEMATICAL FINANCE, Issue 3 2005Michael Kalkbrener Capital allocation techniques are of central importance in portfolio management and risk-based performance measurement. In this paper we propose an axiom system for capital allocation and analyze its satisfiability and completeness: it is shown that for a given risk measure , there exists a capital allocation ,, that satisfies the main axioms if and only if , is subadditive and positively homogeneous. Furthermore, it is proved that the axiom system uniquely specifies ,,. We apply the axiomatization to the most popular risk measures in the finance industry in order to derive explicit capital allocation formulae for these measures. [source] Capital Allocation and Risk Performance Measurement In a Financial InstitutionFINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 5 2000Stuart M. Turnbull This paper provides an analytical and practical framework, consistent with maximizing the wealth of existing shareholders, to address the following questions: What are the costs associated with economic capital? What is the tradeoff between the probability of default and the costs of economic capital? How do we take into account the time profile of economic capital when assessing the performance of a business? What is the appropriate measure of profitability, keeping the probability of default constant? It is shown that the capital budgeting decision depends not only on the covariance of the return of a project with the market portfolio, but also on the covariance with the bank's existing assets. This dependency arises from the simple fact that the economic capital is not additive. [source] Pricing and Capital Allocation for Multiline Insurance FirmsJOURNAL OF RISK AND INSURANCE, Issue 3 2010Rustam Ibragimov We study multiline insurance companies with limited liability. Insurance premiums are determined by no-arbitrage principles. The results are developed under the realistic assumption that the losses created by insurer default are allocated among policyholders following an,ex post, pro rata, sharing rule. In general, the ratio of default costs to expected claims, and thus the ratio of premiums to expected claims, vary across insurance lines. Moreover, capital and related costs are allocated across lines in proportion to each line's share of a digital default option on the insurer. Our results expand and generalize those derived elsewhere in the literature. [source] Capital Allocation for Insurance Companies,What Good IS IT?JOURNAL OF RISK AND INSURANCE, Issue 2 2007Helmut Gründl In their 2001 Journal of Risk and Insurance article, Stewart C. Myers and James A. Read Jr. propose to use a specific capital allocation method for pricing insurance contracts. We show that in their model framework no capital allocation to lines of business is needed for pricing insurance contracts. In the case of having to cover frictional costs, the suggested allocation method may even lead to inappropriate insurance prices. Beside the purpose of pricing insurance contracts, capital allocation methods proposed in the literature and used in insurance practice are typically intended to help derive capital budgeting decisions in insurance companies, such as expanding or contracting lines of business. We also show that net present value analyses provide better capital budgeting decisions than capital allocation in general. [source] Information Production and Capital Allocation: Decentralized versus Hierarchical FirmsTHE JOURNAL OF FINANCE, Issue 5 2002Jeremy C. Stein This paper asks how well different organizational structures perform in terms of generating information about investment projects and allocating capital to these projects. A decentralized approach,with small, single,manager firms,is most likely to be attractive when information about projects is "soft" and cannot be credibly transmitted. In contrast, large hierarchies perform better when information can be costlessly "hardened" and passed along inside the firm. The model can be used to think about the consequences of consolidation in the banking industry, particularly the documented tendency for mergers to lead to declines in small,business lending. [source] Life Sciences Roundtable: Strategy and FinancingJOURNAL OF APPLIED CORPORATE FINANCE, Issue 2 2009Judy Lewent In light of the challenges facing the pharmaceutical industry, a distinguished group of pharma executives and strategic and financial advisers discusses the following corporate decisions: Strategy: What business model is most likely to maximize long-term shareholder value? For example, is diversification by big pharma into areas like consumer healthcare and generics a reliable way to create sustainable value? Capital allocation: What are the best methods for evaluating investments in pharma R&D, and for deciding which programs should be terminated and which assets divested? If conventional DCF isn't much help in a world where R&D outcomes are so uncertain, what about proposed models like real options? Corporate governance and incentive systems: Should big pharma continue to outsource ever more of its R&D functions to biotech and venture capital? Or can it overcome the problems associated with size by creating more decentralized business units and trying to replicate the accountability and incentives of smaller biotech firms? Capital structure and payout policy: Are the large cash and equity positions and minimal payouts of big pharma, typically justified as cushioning the uncertainties associated with pharma R&D, likely to be the value-maximizing capital structure in the future? With many biotechs struggling and venture capital scarce, where are the new sources of capital for the industry? And can future deals be structured in ways that help bring about higher returns for big pharma as well as the R&D providers? Disclosure: What should management tell investors to help ensure that their companies' policies and promising investments are reflected in their stock prices? [source] Foreign Banks in Transition Countries: To Whom Do They Lend and How Are They Financed?FINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 4 2006Ralph De Haas We use focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltic States to analyze the small-business lending and internal capital markets of multinational financial institutions. Our approach allows us to complement the standard empirical literature, which has difficulty in analyzing important issues such as lending technologies and capital allocation. We find that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks' credit supply toward large multinational corporations. Instead, increased competition and the improvement of subsidiaries' lending technologies have led foreign banks to gradually expand into the SME and retail markets. Second, it is demonstrated that local bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank. [source] Capital Allocation for Insurance Companies,What Good IS IT?JOURNAL OF RISK AND INSURANCE, Issue 2 2007Helmut Gründl In their 2001 Journal of Risk and Insurance article, Stewart C. Myers and James A. Read Jr. propose to use a specific capital allocation method for pricing insurance contracts. We show that in their model framework no capital allocation to lines of business is needed for pricing insurance contracts. In the case of having to cover frictional costs, the suggested allocation method may even lead to inappropriate insurance prices. Beside the purpose of pricing insurance contracts, capital allocation methods proposed in the literature and used in insurance practice are typically intended to help derive capital budgeting decisions in insurance companies, such as expanding or contracting lines of business. We also show that net present value analyses provide better capital budgeting decisions than capital allocation in general. [source] CAPITAL ALLOCATION AND RISK CONTRIBUTION WITH DISCRETE-TIME COHERENT RISKMATHEMATICAL FINANCE, Issue 1 2009Alexander S. Cherny We define the capital allocation and the risk contribution for discrete-time coherent risk measures and provide several equivalent representations of these objects. The formulations and the proofs are based on two instruments introduced in the paper: a probabilistic notion of the extreme system and a geometric notion of the generator. These notions are also of interest on their own and are important for other applications of coherent risk measures. All the concepts and results are illustrated by JP Morgan's Risk Metrics model. [source] AN AXIOMATIC APPROACH TO CAPITAL ALLOCATIONMATHEMATICAL FINANCE, Issue 3 2005Michael Kalkbrener Capital allocation techniques are of central importance in portfolio management and risk-based performance measurement. In this paper we propose an axiom system for capital allocation and analyze its satisfiability and completeness: it is shown that for a given risk measure , there exists a capital allocation ,, that satisfies the main axioms if and only if , is subadditive and positively homogeneous. Furthermore, it is proved that the axiom system uniquely specifies ,,. We apply the axiomatization to the most popular risk measures in the finance industry in order to derive explicit capital allocation formulae for these measures. [source] The Oecd Model Tax Treaty: Tax Competition And Two-Way Capital Flows*INTERNATIONAL ECONOMIC REVIEW, Issue 2 2003Ronald B. Davies Model tax treaties do not require tax rate coordination, but do require that either credits or exemptions be applied to repatriated earnings. This contradicts recent models with a single capital exporter where deductions are most efficient. I incorporate the fact that capital flows are typically bilateral. With symmetric countries, credits by both is the unique and efficient treaty equilibrium. This equilibrium weakly dominates the nontreaty equilibrium. With asymmetric countries, the treaty need not offer improvements without tax harmonization. With harmonization, it is always possible to reach efficient capital allocations while increasing both countries' welfares only if neither uses deductions. [source] | ||||||||||