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Type | Journal Article |
Scope | Discipline-based scholarship |
Title | Risk minimization and optimal derivative design in a principal agent game |
Organization Unit | |
Authors |
|
Item Subtype | Original Work |
Refereed | Yes |
Status | Published in final form |
Language |
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Journal Title | Mathematics and Financial Economics |
Publisher | Springer |
Geographical Reach | international |
ISSN | 1862-9679 |
Volume | 2 |
Number | 1 |
Page Range | 1 - 27 |
Date | 2008 |
Abstract Text | We consider the problem of Adverse Selection and optimal derivative design within a Principal–Agent framework. The principal’s income is exposed to non-hedgeable risk factors arising, for instance, from weather or climate phenomena. She evaluates her risk using a coherent and law invariant risk measure and tries minimize her exposure by selling derivative securities on her income to individual agents. The agents have mean–variance preferences with heterogeneous risk aversion coefficients. An agent’s degree of risk aversion is private information and hidden from the principal who only knows the overall distribution. We show that the principal’s risk minimization problem has a solution and illustrate the effects of risk transfer on her income by means of two specific examples. Our model extends earlier work of Barrieu and El Karoui (in Financ Stochast 9, 269–298, 2005) and Carlier et al. (in Math Financ Econ 1, 57–80, 2007). |
Free access at | Related URL |
Digital Object Identifier | 10.1007/s11579-008-0012-8 |
Other Identification Number | merlin-id:7969 |
PDF File | Download from ZORA |
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