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Pooling, pricing and trading of risks

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  • Sjur Flåm

Abstract

Exchange of risks is considered here as a transferable-utility, cooperative game, featuring risk averse players. Like in competitive equilibrium, a core solution is determined by shadow prices on state-dependent claims. And like in finance, no risk can properly be priced merely in terms of its marginal distribution. Pricing rather depends on the pooled risk and on the convolution of individual preferences. The paper elaborates on these features, placing emphasis on the role of prices and incompleteness. Some novelties come by bringing questions about existence, computation and uniqueness of solutions to revolve around standard Lagrangian duality. Especially outlined is how repeated bilateral trade may bring about a price-supported core allocation. Copyright Springer Science+Business Media, LLC 2009

Suggested Citation

  • Sjur Flåm, 2009. "Pooling, pricing and trading of risks," Annals of Operations Research, Springer, vol. 165(1), pages 145-160, January.
    • Handle: RePEc:spr:annopr:v:165:y:2009:i:1:p:145-160:10.1007/s10479-007-0305-y
    DOI: 10.1007/s10479-007-0305-y
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    References listed on IDEAS

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