On the Shortfall of Tail-Based Entropy and Its Application to Capital Allocation
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.
Authors
- P. Li (ORCID: https://orcid.org/0009-0008-1741-4265)
- Chuancun Yin (ORCID: https://orcid.org/0000-0003-2539-5443)
Institutions
- Qufu Normal University (CN)
Publication Details
- Journal
- Entropy
- Published
- 2025-11-13
- DOI
- https://doi.org/10.3390/e27111153
- Primary Topic
- Risk and Portfolio Optimization
- Type
- article
- Field-Weighted Citation Impact
- 0.00