Inf-convolution of risk measures and optimal risk transfer
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The authors develop a methodology for optimal design of financial instruments aimed to hedge some forms of risk that is not traded on financial markets. The economic agents are supposed to may take positions on two types of risk: a purely financial risk (or market risk) and a (non-financial) non-tradable risk. The optimal structure of a contract depending on the non-tradable risk and its price are determined. Some results in an exponential utility framework, where both agents have access to a financial market to reduce their risk, are presented. A general framework involving convex risk measures and their inf-convolution, is developed. The impact of both the financial market and the non-tradable risk on risk measures is studied and a characterization of the optimal structure, explicitly for a particular family of risk measures and as a necessary and sufficient condition in a general framework, is established. Two examples are given which deal with the hedging issue and the optimality in the inf-convolution problem.
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