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Law-invariant insurance pricing and its limitations

Fabio Bellini, Pablo Koch-Medina, Cosimo Munari and Gregor Svindland

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Abstract: We show that a law-invariant pricing functional defined on a general Orlicz space is typically incompatible with frictionless risky assets in the sense that one and only one of the following alternatives can hold: Either every risky payoff has a strictly-positive bid-ask spread or the pricing functional is given by an expectation and, hence, every payoff has zero bid-ask spread. In doing so we extend and unify a variety of "collapse to the mean" results from the literature and highlight the key role played by law invariance in causing the collapse. As a byproduct, we derive a number of applications to law-invariant acceptance sets and risk measures as well as Schur-convex functionals.

New Economics Papers: this item is included in nep-rmg
Date: 2018-08
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