Data Management

Risk Measures: Rationality And Diversification

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Executive Summary

When there is uncertainty about interest rates (typically due to either illiquidity or defaultability of zero coupon bonds) the cash-additivity assumption on risk measures becomes problematic. When this assumption is weakened, to cash-subadditivity for example, the equivalence between convexity and the diversification principle no longer holds. In fact, this principle only implies (and it is implied by) quasiconvexity. For this reason, in this paper quasiconvex risk measures are studied. The authors provide a dual characterization of quasiconvex cash-subadditive risk measures and they establish necessary and sufficient conditions for their law invariance. As a byproduct, they obtain an alternative characterization of the actuarial mean value premium principle.

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