FEEM working papers "Note di lavoro" series
2014 .047

Risk Allocation under Liquidity Constraints


Authors: Péter Csóka, P. Jean-Jacques Herings
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Keywords: Market Microstructure, Coherent Measures of Risk, Market Liquidity, Portfolio Performance Evaluation, Risk Capital Allocation, Totally Balanced Games
JEL n.: C71, G10

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.

***

Suggested citation: Csóka, P., P. J.-J. Herings, (2014), 'Risk Allocation under Liquidity Constraints', Nota di Lavoro 47.2014, Milan, Italy: Fondazione Eni Enrico Mattei.

Download file
Download PDF file

FEEM Newsletter & Update

Subscribe to stay connected.

Your personal data will be processed by Fondazione Eni Enrico Mattei. – data Controller – with the aim of emailing the FEEM newsletter & Update. The use of Your email address is necessary for the implementation of the newsletter service. You are invited to read the Privacy Policy in order to obtain additional information about the protection of Your rights.

This Website uses technical cookies and cookie analytics, as well as “third party” profiling cookies.
If you close this banner or you decide to continue navigating on this Website, you express consent to the use of cookies. If you need additional information or you wish to express selective choices on the use of cookies, please refer to the   Cookie PolicyI agree