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Effective risk aversion in thin risk-sharing markets

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  • Michail Anthropelos
  • Constantinos Kardaras
  • Georgios Vichos

Abstract

We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We argue that traders relatively more exposed to market risk tend to submit more elastic demand functions. Noncompetitive equilibrium prices and allocations result as an outcome of a game among traders. General sufficient conditions for existence and uniqueness of such equilibrium are provided, with an extensive analysis of two-trader transactions. Even though strategic behaviour causes inefficient social allocations, traders with sufficiently high risk tolerance and/or large initial exposure to market risk obtain more utility gain in the noncompetitive equilibrium, when compared to the competitive one.

Suggested Citation

  • Michail Anthropelos & Constantinos Kardaras & Georgios Vichos, 2017. "Effective risk aversion in thin risk-sharing markets," Papers 1707.05096, arXiv.org, revised Jun 2018.
    • Handle: RePEc:arx:papers:1707.05096
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    References listed on IDEAS

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    Cited by:

    1. Anthropelos, Michail & Boonen, Tim J., 2020. "Nash equilibria in optimal reinsurance bargaining," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 196-205.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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