Skip to main content
eScholarship
Open Access Publications from the University of California

Optimal risk sharing under distorted probabilities

  • Author(s): Ludkovski, Michael
  • Young, Virginia R.
  • et al.
Abstract

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.

Many UC-authored scholarly publications are freely available on this site because of the UC Academic Senate's Open Access Policy. Let us know how this access is important for you.

Main Content
Current View