UC Santa Barbara
Optimal risk sharing under distorted probabilities
- Author(s): Ludkovski, Michael
- Young, Virginia R.
- et al.
Published Web Locationhttps://doi.org/10.1007/s11579-009-0015-0
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.
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