Patrick S. Hagan, Andrew Lesniewski, Georgios E. Skoufis, Diana E. Woodward
arXiv 9 Mar 2021 · Finance — Computational · publishedInternational Journal of Financial Engineering (2023) · 5 citations (OpenAlex)
arXiv:2103.05453 · PDF · DOI · OpenAlex · Extracted main text
We argue that using the Shapley value of cooperative game theory as the scheme for risk allocation among non-orthogonal risk factors is a natural way of interpreting the contribution made by each of such factors to overall portfolio risk. We discuss a Shapley value scheme for allocating risk to non-orthogonal greeks in a portfolio of derivatives. Such a situation arises, for example, when using a stochastic volatility model to capture option volatility smile. We also show that Shapley value allows for a natural method of interpreting components of enterprise risk measures such as VaR and ES. For all applications discussed, we derive explicit formulas and / or numerical algorithms to calculate the allocations.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Maschler, M., Solan, E., and Zamir, S.: Game Theory, Cambridge Unive… (2013) | 0.811 | 4 | 2 | 100% |
| 2 | Wang, S.: A set of new methods and tools for enterprise risk capital… (2002) | 0.737 | 3 | 2 | 100% |
| 3 | Bartlett, B.: Hedging under SABR model, Wilmott Magazine, July/Augus… (2006) | 0.511 | 2 | 1 | 100% |
| 4 | Colini-Baldeschi, R., Scarsini, M., and Vaccari, S.: Variance alloca… (2018) | 0.511 | 2 | 1 | 100% |
| 5 | Hagan, P. S., Kumar, D., Lesniewski, A., and Woodward, D. E: Managin… (2002) self | 0.511 | 2 | 1 | 100% |
| 6 | Hagan, P. S., and Lesniewski, A.: Bartlett's delta in the SABR model… (2019) self | 0.511 | 2 | 1 | 100% |
| 7 | Mann, I., and Shapley, L. S.: Values of large games, IV: Evaluating… (1960) | 0.511 | 2 | 1 | 100% |
| 8 | Boonen, T. J., De Waegenaere, A., and Norde, A.: A generalization of… (2020) | 0.405 | 1 | 1 | 100% |
| 9 | Castro, J., Gomez, D., and Tejada, J.: Polynomial calculation of the… (2009) | 0.405 | 1 | 1 | 100% |
| 10 | Cambanis, S., Huang, S., and Simons, G.: On the theory of elliptical… (1981) | 0.405 | 1 | 1 | 100% |
Showing the top 10 of 18 scored citations.