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Equilibrium in risk-sharing games

Anthropelos, Michail and Kardaras, Constantinos (2017) Equilibrium in risk-sharing games. Finance and Stochastics. pp. 1-51. ISSN 0949-2984

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Identification Number: 10.1007/s00780-017-0323-9

Abstract

The large majority of risk-sharing transactions involve few agents, each of whom can heavily influence the structure and the prices of securities. In this paper, we propose a game where agents’ strategic sets consist of all possible sharing securities and pricing kernels that are consistent with Arrow–Debreu sharing rules. First, it is shown that agents’ best response problems have unique solutions. The risk-sharing Nash equilibrium admits a finite-dimensional characterisation, and it is proved to exist for an arbitrary number of agents and to be unique in the two-agent game. In equilibrium, agents declare beliefs on future random outcomes different from their actual probability assessments, and the risk-sharing securities are endogenously bounded, implying (among other things) loss of efficiency. In addition, an analysis regarding extremely risk-tolerant agents indicates that they profit more from the Nash risk-sharing equilibrium than compared to the Arrow–Debreu one.

Item Type: Article
Official URL: https://link.springer.com/journal/780
Additional Information: © 2017 The Authors © CC BY 4.0.
Subjects: H Social Sciences > HA Statistics
JEL classification: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
Sets: Departments > Statistics
Date Deposited: 09 Mar 2017 15:42
Last Modified: 05 Sep 2017 09:13
Projects: FP7-PEOPLE-2012-CIG, 334540
Funders: Research Center of the University of Piraeus, Marie Curie Career Integration Grants
URI: http://eprints.lse.ac.uk/id/eprint/69767

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