Cooperative investment in incomplete markets under financial fairness

Jaroslav Pazdera, Hans Schumacher, Bas Werker

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Groups of agents, such as participants in a collective pension fund, can decide to undertake a joint investment and to define, ex ante, a rule for the division of proceeds. The collective investment decision and the allocation rule together form a risk sharing scheme. Such a scheme defines a contingent claim for each participant. Given a proposed risk sharing scheme and an agreed-upon pricing functional, the values of these claims can be determined and can be compared to the values of the contributions made by the agents. A risk sharing scheme is said to be financially fair if, for each agent, the value of the agent’s claim as defined by the scheme is equal to the value of the agent’s contribution. The paper provides conditions under which there exists a unique risk sharing scheme that is both Pareto efficient (in the sense of expected utility) and financially fair. Furthermore, an iterative algorithm is presented by which this scheme can be computed. The theory is illustrated by a simple example which shows that, in an incomplete financial market, agents may benefit substantially from forming a collective.
Original languageEnglish
Pages (from-to)394-406
JournalInsurance: Mathematics & Economics
Volume71
DOIs
Publication statusPublished - Nov 2016

Fingerprint

Incomplete Markets
Fairness
Risk Sharing
Contingent Claims
Expected Utility
Financial Markets
Incomplete markets
Pareto
Iterative Algorithm
Pricing
Division
Risk sharing

Keywords

  • risk sharing
  • cooperative investment
  • incomplete markets
  • financial fairness
  • syndicates

Cite this

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abstract = "Groups of agents, such as participants in a collective pension fund, can decide to undertake a joint investment and to define, ex ante, a rule for the division of proceeds. The collective investment decision and the allocation rule together form a risk sharing scheme. Such a scheme defines a contingent claim for each participant. Given a proposed risk sharing scheme and an agreed-upon pricing functional, the values of these claims can be determined and can be compared to the values of the contributions made by the agents. A risk sharing scheme is said to be financially fair if, for each agent, the value of the agent’s claim as defined by the scheme is equal to the value of the agent’s contribution. The paper provides conditions under which there exists a unique risk sharing scheme that is both Pareto efficient (in the sense of expected utility) and financially fair. Furthermore, an iterative algorithm is presented by which this scheme can be computed. The theory is illustrated by a simple example which shows that, in an incomplete financial market, agents may benefit substantially from forming a collective.",
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Cooperative investment in incomplete markets under financial fairness. / Pazdera, Jaroslav; Schumacher, Hans; Werker, Bas.

In: Insurance: Mathematics & Economics, Vol. 71, 11.2016, p. 394-406.

Research output: Contribution to journalArticleScientificpeer-review

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