Agents' Strategic Behavior in Optimal Risk Sharing
AbstractWe consider the market of n financial agents who aim to increase their utilities by efficiently sharing their random endowments. Given the endogenously derived optimal sharing rules, we address the situation where agents do not reveal their true endowments, but instead they report as endowments the random quantities that maximize their utilities when the sharing rules are applied. Under mean-variance preferences, it is shown that each agent should share only a fraction of his true endowment and report that he is exposed to some endowment he does not possess. Furthermore, if all agents follow similar strategic behavior, the market equilibrates at a Nash-type equilibrium which benefits the speculators and results in risk sharing inefficiency. This agents' strategic behavior, when applied to oligopoly markets of exogenously given financial securities, changes the effective market portfolio and implies a price pressure on the traded securities in the CAPM.
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Date of creation: Jun 2012
Date of revision: Mar 2013
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