Risk aggregation and Extreme Events [74]

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Bullet points include: E.g. consider firm with n business lines, loss per unit exposure from each is Li, i = 1 to n Suppose risk measure, F(L) based on loss function L satisfies positive homogeneity (one of the axioms underlying coherence), i.e. F(kL) = kF(L) [more generally positive homogeneity of order q: F(kL) = kqF(L)]  Then natural capital allocation is to follow Euler principle with ki being the target business line exposure Corresponds to the Marginal VaR (aka Internal beta) approach to setting RAROC rate and to implied alphas etc.

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