2023/09/14 by Solveig Flaig, Flaig, Solveig, Gero Junike +1 · 1 citation
Decision Sciences · Economics, Econometrics and Finance · #Capital Investment and Risk Analysis #FOS: Economics and business #Financial Markets and Investment Strategies #Portfolio Management (q-fin.PM) #Risk and Portfolio Optimization
paper · pdf · doi:10.48550/arxiv.2309.07667
openalex publication_date 2023/09/14 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
The profit and loss (p&l) attrition for each business year into different risk or risk factors (e.g., interest rates, credit spreads, foreign exchange rate etc.) is a regulatory requirement, e.g., under Solvency 2. Three different decomposition principles are prevalent: one-at-a-time (OAT), sequential updating (SU) and average sequential updating (ASU) decompositions. In this research, using financial market data from 2003 to 2022, we demonstrate that the OAT decomposition can generate significant unexplained p&l and that the SU decompositions depends significantly on the order or labeling of the risk factors. On the basis of an investment in a foreign stock, we further explain that the SU decomposition is not able to identify all relevant risk factors. This potentially effects the hedging strategy of the portfolio manager. In conclusion, we suggest to use the ASU decomposition in practice.