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Inf-convolution of risk measures and optimal risk transfer

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  • Pauline Barrieu

    ()

  • Nicole El Karoui

    ()

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    Abstract

    We develop a methodology for optimal design of financial instruments aimed to hedge some forms of risk that is not traded on financial markets. The idea is to minimize the risk of the issuer under the constraint imposed by a buyer who enters the transaction if and only if her risk level remains below a given threshold. Both agents have also the opportunity to invest all their residual wealth on financial markets, but with different access to financial investments. The problem is reduced to a unique inf-convolution problem involving a transformation of the initial risk measures. Copyright Springer-Verlag Berlin/Heidelberg 2005

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    File URL: http://hdl.handle.net/10.1007/s00780-005-0152-0
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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 9 (2005)
    Issue (Month): 2 (04)
    Pages: 269-298

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    Handle: RePEc:spr:finsto:v:9:y:2005:i:2:p:269-298

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    Web page: http://www.springerlink.com/content/101164/

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    Related research

    Keywords: Inf-convolution; risk measure; optimal design; indifference pricing; hedging strategy;

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