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19-01-2021 | Issue 2/2021 Open Access

Mathematics and Financial Economics 2/2021

Systemic optimal risk transfer equilibrium

Journal:
Mathematics and Financial Economics > Issue 2/2021
Authors:
Francesca Biagini, Alessandro Doldi, Jean-Pierre Fouque, Marco Frittelli, Thilo Meyer-Brandis
Important notes
J-P. Fouque: Work supported by NSF Grant DMS-1814091.

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Abstract

We propose a novel concept of a Systemic Optimal Risk Transfer Equilibrium (SORTE), which is inspired by the Bühlmann’s classical notion of an Equilibrium Risk Exchange. We provide sufficient general assumptions that guarantee existence, uniqueness, and Pareto optimality of such a SORTE. In both the Bühlmann and the SORTE definition, each agent is behaving rationally by maximizing his/her expected utility given a budget constraint. The two approaches differ by the budget constraints. In Bühlmann’s definition the vector that assigns the budget constraint is given a priori. On the contrary, in the SORTE approach, the vector that assigns the budget constraint is endogenously determined by solving a systemic utility maximization. SORTE gives priority to the systemic aspects of the problem, in order to optimize the overall systemic performance, rather than to individual rationality.
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