Efficiency and equilibria in games of optimal derivative design

DOI10.1007/S11579-012-0066-5MaRDI QIDQ1938971zbMATH OpenOpenAlexFDO

Authors Ulrich Horst, Santiago Moreno-Bromberg

Publication date 26 February 2013

Published in Mathematics and Financial Economics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1107.0839, https://www.zora.uzh.ch/id/eprint/156738/1/ZORA_NL_156738.pdf

zbMATH Keywords

adverse selectioncompeting mechanismsdelegation principlePareto optimalityrisk sharing

Mathematics Subject Classification ID

Noncooperative games (91A10) Other game-theoretic models (91A40) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: In this paper the problem of optimal derivative design, profit maximization and risk minimization under adverse selection when multiple agencies compete for the business of a continuum of heterogenous agents is studied. The presence of ties in the agents' best-response correspondences yields discontinuous payoff functions for the agencies. These discontinuities are dealt with via efficient tie--breaking rules. In a first step, the model presented by Carlier, Ekeland & Touzi (2007) of optimal derivative design by profit-maximizing agencies is extended to a multiple--firm setting, and results of Page & Monteiro (2003, 2007, 2008) are used to prove the existence of (mixed-strategies) Nash equilibria. On a second step we consider the more complex case of risk minimizing firms. Here the concept of socially efficient allocations is introduced, and existence of the latter is proved. It is also shown that in the particular case of the entropic risk measure, there exists an efficient "fix--mix" tie-breaking rule, in which case firms share the whole market over given proportions.

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Cited in

(4)

• The effect of market power on risk-sharing
• Trading under market impact: crossing networks interacting with dealer markets
• Introduction to the special issue: Stochastic financial economics, Volume 2
• Risk minimization and optimal derivative design in a principal agent game

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