Optimal risk sharing under distorted probabilities

By M. Ludkovski, Virginia R. Young. 2008

49 citations recorded by the source corpus.

We study optimal risk sharing among n agents endowed with distortion risk measures. Our model includes market frictions that can either represent linear transaction costs or risk premia charged by a clearing house for the agents. Risk sharing under third-party constraints is also considered. We obtain an explicit formula for Pareto optimal allocations. In particular, we find that a stop-loss or deductible risk sharing is optimal in the case of two agents and several common distortion functions. This extends recent result of Jouini et al. (Adv Math Econ 9:49–72, 2006) to the problem with unbounded risks and market frictions.

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/2c4f4230c42baf28409a9f702a0a6f2325404019

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In Economics and Econometrics

1. Ludger Rüschendorf
2. M. Ludkovski
3. Shige Peng

In Finance

1. Ludger Rüschendorf
2. M. Ludkovski
3. Paul Embrechts
4. Ruodu Wang
5. Shige Peng

In Management Science and Operations Research

1. Ludger Rüschendorf
2. M. Ludkovski
3. Paul Embrechts
4. Ruodu Wang

Citations in the corpus

• On comonotonicity of Pareto optimal risk sharing (2008, background): “For instance, in Jouini et al. (2005), Ludkovski and Young (2007) finding Paretooptimal allocations is reduced to minimizing the linear function f (Y) := n i=1 α i ρ i (Y i ) over possible Lagrange multipliers α i ≥ 0.”