Varying weights of marginal contributions: One approach to solving the low-risk puzzle?

Abstract

This paper enhances previous studies of the so-called low-risk puzzle with concepts from cooperative game theory. To allocate portfolio risk to single assets, previous studies used concepts such as the Shapley value. In these concepts, the marginal contributions of assets to risks of subsets of the portfolio are evaluated with fixed pre-specified weights. In this paper, we vary these weights. We show the application by means of a simulation study. In this context, varying the weights of the marginal contributions generates added value to the solution of the so-called low-risk puzzle.