Pooling, Pricing and Trading of Risks

Sjur Flåm

No 09/06, Working Papers in Economics from University of Bergen, Department of Economics

Abstract: Abstract. Exchange of risks is considered here as a transferableutility, cooperative game, featuring risk averse players. Like in competitive equilibrium, a core solution is determined by shadow prices on state-dependent claims. And like in finance, no risk can properly be priced only in terms of its marginal distribution. Pricing rather depends on the pooled risk and on the convolution of individual preferences. The paper elaborates on these features, placing emphasis on the role of prices and incompleteness. Some novelties come by bringing questions about existence, computation and uniqueness of solutions to revolve around standard Lagrangian duality. Especially outlined is how repeated bilateral trade may bring about a price-supported core allocation.

Keywords: Keywords: cooperative game; transferable utility; core; risks; mutual insurance; contingent prices; bilateral exchange; supergradients; stochastic approximation. (search for similar items in EconPapers)
JEL-codes: C71 D52 G12 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2011-04-01
New Economics Papers: this item is included in nep-gth, nep-ias and nep-upt
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Related works:
Working Paper: Pooling, Pricing and Trading of Risks (2002)
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