Work

On the Shortfall of Tail-Based Entropy and Its Application to Capital Allocation

Year: 2025

Type: article

Abstract: We introduce and study the shortfall of tail-based entropy (STE), a tail-sensitive risk functional that combines expected shortfall (ES) and tail-based entropy (TE). Beyond the tail mean, STE imposes a rank-dependent penalty on tail variability, thereby capturing both the magnitude and variability of tail risk under extremes. The framework encompasses several shortfall-type measures as special cases, such as Gini shortfall, extended Gini shortfall, shortfall of cumulative residual entropy, shortfall of right-tail deviation, and shortfall of cumulative residual Tsallis entropy. We provide equivalent characterizations of STE, derive sufficient conditions for coherence, and establish monotonicity with respect to tail-variability order. As an application, we investigate STE-based capital allocation, deriving closed-form allocation formulas under elliptical and extended skew-normal distributions, along with several illustrative special cases. Finally, an empirical analysis with insurance company data illustrates the implementation and evaluates the performance of the allocation rule.

Source: Entropy

DOI: 10.3390/e27111153

Authors: Pingyun Li, Chuancun Yin

Institution: Qufu Normal University

Language: English

Topic: Risk and Portfolio Optimization

Subfield: Management Science and Operations Research

Field: Decision Sciences

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $3,137

Funder: National Natural Science Foundation of China