The Effect of Market Power on Risk-Sharing
The paper studies an oligopolistic equilibrium model of financial agents who aim to share their random endowments. The risk-sharing securities and their prices are endogenously determined as the outcome of a strategic game played among all the participating agents. In the complete-market setting, each agent's set of strategic choices consists of the security payoffs and the pricing kernel that are consistent with the optimal-sharing rules; while in the incomplete setting, agents respond via demand functions on a vector of given tradeable securities. It is shown that at the (Nash) risk-sharing equilibrium, the sharing securities are suboptimal, since agents submit for sharing different risk exposures than their true endowments. On the other hand, the Nash equilibrium prices stay unaffected by the game only in the special case of agents with the same risk aversion. In addition, agents with sufficiently lower risk aversion act as predatory traders, since they absorb utility surplus from the high risk averse agents and reduce the efficiency of sharing. The main results of the paper also hold under the generalized models that allow the presence of noise traders and heterogeneity in agents' beliefs.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mingxin Xu, 2006.
"Risk measure pricing and hedging in incomplete markets,"
Annals of Finance,
Springer, vol. 2(1), pages 51-71, January.
- Mingxin Xu, 2004. "Risk Measure Pricing and Hedging in Incomplete Markets," Finance 0406004, EconWPA, revised 06 Apr 2005.
- 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.
- 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.
- Ulrich Horst & Santiago Moreno-Bromberg, 2011. "Efficiency and Equilibria in Games of Optimal Derivative Design," Papers 1107.0839, arXiv.org.
- E. Jouini & W. Schachermayer & N. Touzi, 2008. "Optimal Risk Sharing For Law Invariant Monetary Utility Functions," Mathematical Finance, Wiley Blackwell, vol. 18(2), pages 269-292.
- Elyès Jouini & Walter Schachermayer & Nizar Touzi, 2007. "Optimal Risk Sharing for Law Invariant Monetary Utility Functions," Working Papers halshs-00176606, HAL.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, July.
- Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk-Sharing Arrangements," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 87-113.
- Zhao, Rui R., 2007. "Dynamic risk-sharing with two-sided moral hazard," Journal of Economic Theory, Elsevier, vol. 136(1), pages 601-640, September.
- Rui Zhao, 2001. "Repeated Two-Sided Moral Hazard," Discussion Papers 01-07, University at Albany, SUNY, Department of Economics.
- Tessa Bold, 2009. "Implications of Endogenous Group Formation for Efficient Risk-Sharing," Economic Journal, Royal Economic Society, vol. 119(536), pages 562-591, 03.
- Michail Anthropelos & Gordan Zitkovic, 2008. "On Agents' Agreement and Partial-Equilibrium Pricing in Incomplete Markets," Papers 0803.2198, arXiv.org.
- Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2011. "Financial Markets Equilibrium with Heterogeneous Agents," Review of Finance, European Finance Association, vol. 16(1), pages 285-321.
- Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2012. "Financial Markets Equilibrium with Heterogeneous Agents," Post-Print halshs-00488537, HAL.
- Michail Anthropelos & Gordan Žitković, 2010. "Partial equilibria with convex capital requirements: existence, uniqueness and stability," Annals of Finance, Springer, vol. 6(1), pages 107-135, January.
- Ulrich Horst & Traian A. Pirvu & GonÃ§alo Dos Reis, 2010. "On Securitization, Market Completion and Equilibrium Risk Transfer," SFB 649 Discussion Papers SFB649DP2010-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- 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.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- 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.
- repec:dau:papers:123456789/361 is not listed on IDEAS Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1206.0384. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.