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Contribution Details

Type Journal Article
Scope Discipline-based scholarship
Title Risk minimization and optimal derivative design in a principal agent game
Organization Unit
Authors
  • Ulrich Horst
  • Santiago Moreno-Bromberg
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
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).
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Digital Object Identifier 10.1007/s11579-008-0012-8
Other Identification Number merlin-id:7969
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