Risk concentration and the mean-expected shortfall criterion

Abstract

Expected shortfall (ES, also known as CVaR) is the most important coherent risk measure in finance, insurance, risk management, and engineering. Recently, Wang and Zitikis (2021) put forward four economic axioms for portfolio risk assessment and provide the first economic axiomatic foundation for the family of $\mathrm{ES}$. In particular, the axiom of no reward for concentration (NRC) is arguably quite strong, which imposes an additive form of the risk measure on portfolios with a certain dependence structure. We move away from the axiom of NRC by introducing the notion of concentration aversion, which does not impose any specific form of the risk measure. It turns out that risk measures with concentration aversion are functions of ES and the expectation. Together with the other three standard axioms of monotonicity, translation invariance and lower semicontinuity, concentration aversion uniquely characterizes the family of ES. In addition, we establish an axiomatic foundation for the problem of mean-ES portfolio selection and new explicit formulas for convex and consistent risk measures. Finally, we provide an economic justification for concentration aversion via a few axioms on the attitude of a regulator towards dependence structures.