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Article

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Published version

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2016-12

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Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/106843

Compositional methods applied to capital allocation problems

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https://doi.org/10.21314/JOR.2016.345

Abstract

In this paper, we examine the relationship between capital allocation problems and compositional data, ie, information that refers to the parts of a whole conveying relative information. We show that capital allocation principles can be interpreted as compositions. The natural geometry and vector space structure of compositional data are used to operate with capital allocation solutions. The distance and average that are appropriated in the geometric structure of compositions are presented. We demonstrate that these two concepts can be used to compare capital allocation principles and merge them. An illustration is provided to show how the distance between capital allocation solutions and average of these solutions can be computed, and interpreted, by risk managers in practice.

Subject

Risc (Economia), Capital, Econometria

Subject (English)

Risk, Capital, Econometrics

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Articles publicats en revistes (Econometria, Estadística i Economia Aplicada)

Citation

BELLES SAMPERA, Jaume, GUILLÉN, Montserrat and SANTOLINO, Miguel. Compositional methods applied to capital allocation problems. Journal of Risk. 2016. Vol. 19, num. 2, pags. 1-10. ISSN 1465-1211. [consulted: 11 of August of 2026]. Available at: https://hdl.handle.net/2445/106843

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