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Some results on Denault's capital allocation rule.

By Steven Vanduffel and Jan Dhaene

Abstract

Denault (2001) introduces a capital allocation principle where the capital allocated to any risk unit is expressed in terms of the contribution of that risk to the aggregate conditional tail expectation. Panjer (2002) derives a closed-form expression for this allocation rule in the multivariate normal case. Landsman & Valdez (2003) generalize Panjer's result to the class of multivariate elliptical distributions. In this paper we provide an alternative and much simpler proof for the allocation formula in the elliptical case. Further, we show how to derive accurate closed-form approximations for Denault's allocation formula in case of lognormal risks.Capital allocation;

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