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Agents' Strategic Behavior in Optimal Risk Sharing

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  • Michail Anthropelos

Abstract

We 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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Paper provided by arXiv.org in its series Papers with number 1206.0384.

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Date of creation: Jun 2012
Date of revision: Mar 2013
Handle: RePEc:arx:papers:1206.0384

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  1. Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk--Sharing Arrangements," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 87-113, January.
  2. Ulrich Horst & Santiago Moreno-Bromberg, 2010. "Efficiency and Equilibria in Games of Optimal Derivative Design," SFB 649 Discussion Papers SFB649DP2010-035, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Mingxin Xu, 2006. "Risk measure pricing and hedging in incomplete markets," Annals of Finance, Springer, vol. 2(1), pages 51-71, January.
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  6. Michail Anthropelos & Gordan Zitkovic, 2008. "On Agents' Agreement and Partial-Equilibrium Pricing in Incomplete Markets," Papers 0803.2198, arXiv.org.
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  8. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
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  10. Damir Filipović & Gregor Svindland, 2008. "Optimal capital and risk allocations for law- and cash-invariant convex functions," Finance and Stochastics, Springer, vol. 12(3), pages 423-439, July.
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  12. Jouini, Elyès & Schachermayer, Walter & Touzi, Nizar, 2008. "Optimal Risk Sharing for Law Invariant Monetary Utility Functions," Economics Papers from University Paris Dauphine 123456789/361, Paris Dauphine University.
  13. Damir Filipović & Michael Kupper, 2008. "Equilibrium Prices For Monetary Utility Functions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 325-343.
  14. Ulrich Horst & Traian A. Pirvu & Gonçalo Dos Reis, 2010. "On Securitization, Market Completion and Equilibrium Risk Transfer," SFB 649 Discussion Papers SFB649DP2010-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  15. Pauline Barrieu & Nicole El Karoui, 2005. "Inf-convolution of risk measures and optimal risk transfer," Finance and Stochastics, Springer, vol. 9(2), pages 269-298, 04.
  16. Tessa Bold, 2009. "Implications of Endogenous Group Formation for Efficient Risk-Sharing," Economic Journal, Royal Economic Society, vol. 119(536), pages 562-591, 03.
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