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Capital requirements: Are they the best solution?

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dc.affiliation.dptoUC3M. Departamento de Economía de la Empresaes
dc.contributor.authorBalbás, Alejandro
dc.contributor.editorUniversidad Carlos III de Madrid. Departamento de Economía de la Empresa
dc.date.accessioned2008-12-17T12:40:22Z
dc.date.available2008-12-17T12:40:22Z
dc.date.issued2008-12
dc.description.abstractGeneral risk functions are becoming very important in finance and insurance. Many risk functions are interpreted as initial capital requirements that a manager must add and invest in a risk-free security in order to protect his clients wealth. Nevertheless, until now it has not been proved that an alternative investment will be outperformed by the riskless asset. This paper deals with a complete arbitrage free market and a general expectation bounded risk measure and analyzes whether the investment in the riskless asset of the capital requirements is optimal. It is shown that it is not optimal in many important cases. For instance, if the risk measure is the CVaR and we consider the assumptions of the CAPM or the Black and Scholes model. Furthermore, the Black and Scholes model the explicit expression of the optimal strategy is provided, and it is composed of several put options. If the confidence level of the CVaR is close to 100% then the optimal strategy becomes a classical portfolio insurance strategy. This may be a surprising and important finding for both researchers and practitioners. In particular, managers can discover how to reduce the level of initial capital requirements by trading options.
dc.format.mimetypeapplication/pdf
dc.identifier.repecwb087114
dc.identifier.urihttps://hdl.handle.net/10016/3367
dc.language.isoeng
dc.relation.ispartofseriesUC3M Working papers. Business Economics
dc.relation.ispartofseries08-14
dc.rightsAtribución-NoComercial-SinDerivadas 3.0 España
dc.rights.accessRightsopen access
dc.rights.urihttp://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.ecienciaEmpresa
dc.subject.jelG11
dc.subject.jelG13
dc.subject.jelG22
dc.subject.jelG23
dc.subject.otherRisk measure
dc.subject.otherCapital requirement
dc.subject.otherOptimal strategy
dc.subject.otherPortfolio insurance
dc.titleCapital requirements: Are they the best solution?
dc.typeworking paper*
dspace.entity.typePublication
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