Borch's theorem from the perspective of comonotonicity

DOI10.1016/J.INSMATHECO.2013.11.006MaRDI QIDQ2015483zbMATH OpenOpenAlexFDO

Authors K. C. Cheung, Yian Rong, Sheung Chi Phillip Yam

Publication date 23 June 2014

Published in Insurance Mathematics \& Economics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/j.insmatheco.2013.11.006

zbMATH Keywords

Borch's theoremcomonotonicityexpected utility paradigmoptimal risk exchangePareto optimality

Mathematics Subject Classification ID

Utility theory (91B16)

Review text

The paper deals with Borch's theorem on the characterization of Pareto optimal risk exchange treaties under the expected utility paradigm (in the framework of risk allocation the Pareto optimality means that it is impossible to improve the wellbeing of one trader without worsening the wellbeing of at least one other trader). Instead of optimizing by means of the traditional Lagrangian method or variational arguments the paper proposes a new method based on a Breeden-Litzenberger integral representation formula which allows to rewrite the objective function into a sum of mixtures of stop-loss transforms of the risk allocations. Moreover, this sum can be optimized applying the theory of comonotonicity. This approach enables e.g. to derive a closed-form expression for the given problem including the classical Borch's theorem and other interesting results.

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Cited in

(9)

• Probabilistic solutions for a class of deterministic optimal allocation problems
• Efficient allocations under law-invariance: a unifying approach
• Borch's theorem, equal margins, and efficient allocation
• Optimal capital allocation for individual risk model using a mean-variance principle
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• Risk exchange I: A unification of some existing results
• The optimal insurance under disappointment theories
• Pareto-optimal risk exchange in a continuous-time economy: application to target benefit pension
• Pareto efficiency and financial fairness under limited expected loss constraint

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