Optimal capital allocation in a hierarchical corporate structure

Yaniv Zaks, Andreas Tsanakas

Research output: Contribution to journalArticlepeer-review

14 Scopus citations


We consider capital allocation in a hierarchical corporate structure where stakeholders at two organizational levels (e.g., board members vs line managers) may have conflicting objectives, preferences, and beliefs about risk. Capital allocation is considered as the solution to an optimization problem whereby a quadratic deviation measure between individual losses (at both levels) and allocated capital amounts is minimized. Thus, this paper generalizes the framework of Dhaene et al. (2012), by allowing potentially diverging risk preferences in a hierarchical structure. An explicit unique solution to this optimization problem is given. In several examples, it is shown how the optimal capital allocation achieves a compromise between conflicting views of risk within the organization.

Original languageEnglish
Pages (from-to)48-55
Number of pages8
JournalInsurance: Mathematics and Economics
Issue number1
StatePublished - May 2014
Externally publishedYes

Bibliographical note

Cited By :12

Export Date: 31 March 2022


Correspondence Address: Zaks, Y.; Department of Mathematics, Bar-Ilan University, Ramat-Gan 5290002, Israel; email: yaniv.zaks@gmail.com


  • Basel II
  • Capital allocation
  • Hierarchical firms
  • Solvency II
  • Weighted capital allocation


Dive into the research topics of 'Optimal capital allocation in a hierarchical corporate structure'. Together they form a unique fingerprint.

Cite this