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Assistant Professor, Department of Economics, Allameh Tabatabaee University, Tehran, Iran , mir30kas@gmail.com
Abstract: (17 Views)
Risk management involved in the activities of economic enterprises, especially financial institutions, and its critical role for long-term survival and dynamic compliance with the requirements and limitations of economic capital resources available to them, has raised serious concerns about risk budgeting among researchers and managers. Accordingly, the dynamic risk budgeting approach in a parsimonious analytical setting including necessarily the relevant real-world characteristic and determining elements constitutes the focal point of this study. Therefore, by the use of a time-consistent continuous-time dynamic stochastic partial equilibrium model for economic agents’ decision making, the implications of the financial market frictions and the tax code convexity for dynamic risk budget adjustments and optimal hedging strategies have been investigated. It is shown how market frictions and such distortionary policy interventions can, under certain conditions, have distributional effects on hedged returns and thereby dynamic risk budgeting. How market frictions and tax code convexity interact in the context of risk budgeting dynamics and their policy and regulatory implications are also analyzed. The implications of the transaction costs entailed each case have also been explored in the quantitative simulation.
Keywords: Risk Budgeting, Financial Market Frictions, Tax Code Convexity, Conditional Value at Risk, Hedging Costs, Transaction Costs
Type of Study: Research |
Subject:
financial economics
Received: Nov 29 2025 | Accepted: Dec 23 2025
Received: Nov 29 2025 | Accepted: Dec 23 2025
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