Paper: arXiv 2603.26491

Authors: Wing Fung Chong, Runhuan Feng, Kenneth Tsz Hin Ng

Abstract

This article proposes a new class of risk-sharing rules by exploring the relationship between capital allocation and risk sharing. While the former is concerned with ex-ante allocating capitals to different lines of business within a corporation based on the relationship among the individual risks, often also through the aggregate risk, the latter is an arrangement which collects risks from and allocates them to, also ex-ante, a group of participants. Drawing on this analogy, we introduce a novel idea of inducing risk-sharing rules by randomizing existing capital allocation principles. Such an approach derives new risk-sharing rules complementing known results in the literature, which were largely based on economic principles and Pareto optimality.

Complexity vs Empirical Score

  • Math Complexity: 7.0/10
  • Empirical Rigor: 2.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper introduces an innovative theoretical framework connecting capital allocation principles and risk sharing through randomization. While mathematically solid and original, it remains purely theoretical with little to no empirical validation or backtesting on real financial data.

Research Flowchart

  flowchart TD
    A["Research Goal: Develop new risk-sharing rules<br/>by bridging Capital Allocation & Risk Sharing"] --> B["Inputs: Individual & Aggregate Business Line Risks<br/>+ Existing Capital Allocation Principles"]
    B --> C["Core Methodology: Randomize ex-ante<br/>Capital Allocation Principles"]
    C --> D["Mathematical Derivation:<br/>Induce explicit Risk-Sharing Rules"]
    D --> E["Evaluation: Compare derived rules against<br/>Pareto-Optimality & Economic Principles"]
    E --> F["Outcome: Novel class of actuarial risk-sharing rules<br/>complementing traditional economic models"]

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3 of 80 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.