Risk minimization and optimal derivative design in a principal agent game
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Publication:841647
DOI10.1007/S11579-008-0012-8zbMATH Open1177.91082arXiv0710.5512OpenAlexW1634749637MaRDI QIDQ841647FDOQ841647
Authors: Ulrich Horst, Santiago Moreno-Bromberg 
Publication date: 18 September 2009
Published in: Mathematics and Financial Economics (Search for Journal in Brave)
Abstract: We consider the problem of Adverse Selection and optimal derivative design within a Principal-Agent framework. The principal's income is exposed to non-hedgeable risk factors arising, for instance, from weather or climate phenomena. She evaluates her risk using a coherent and law invariant risk measure and tries minimize her exposure by selling derivative securities on her income to individual agents. The agents have mean-variance preferences with heterogeneous risk aversion coefficients. An agent's degree of risk aversion is private information and hidden to the principal who only knows the overall distribution. We show that the principal's risk minimization problem has a solution and illustrate the effects of risk transfer on her income by means of two specific examples. Our model extends earlier work of Barrieu and El Karoui (2005) and Carlier, Ekeland and Touzi (2007).
Full work available at URL: https://arxiv.org/abs/0710.5512
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Cited In (7)
- Risk-adjusted bowley reinsurance under distorted probabilities
- Efficiency and equilibria in games of optimal derivative design
- Optimal mechanism design with risk-loving agents
- An algorithm for computing solutions of variational problems with global convexity constraints
- A continuous-time theory of reinsurance chains
- Optimal derivatives design for mean-variance agents under adverse selection
- The effect of market power on risk-sharing
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