A shortcut to sign Incremental Value-at-Risk for risk allocation

TL;DR

This paper introduces simplified formulas for Incremental Value-at-Risk to facilitate risk allocation, comparing risk adding and pooling scenarios and highlighting the differing conditions for each.

Contribution

It develops beta-based approximate IVaR formulas for both risk adding and pooling, providing practical guidelines for risk management decisions.

Findings

Risk pooling conditions are less restrictive than risk adding.

Beta-based formulas effectively approximate IVaR in practice.

Guidelines improve risk allocation strategies.

Abstract

Approximate Incremental Value-at-Risk formulae provide an easy-to-use preliminary guideline for risk allocation. Both the cases of risk adding and risk pooling are examined and beta-based formulae achieved. Results highlight how much the conditions for adding new risky positions are stronger than those required for risk pooling. Key words: Incremental Value-at-Risk (IVaR); Risk pooling; Risk adding.