Optimal Risk Sharing under Distorted Probabilities

@inproceedings{Ludkovski2008OptimalRS,
  title={Optimal Risk Sharing under Distorted Probabilities},
  author={Michael Ludkovski and Virginia R. Young},
  year={2008}
}
We study optimal risk sharing among n agents endowed with distortion risk measures. Our model includes market frictions that can either represent linear transaction costs or risk premia charged by a clearing house for the agents. Risk sharing under thirdparty constraints is also considered. We obtain an explicit formula for Pareto optimal allocations. In particular, we find that a stop-loss or deductible risk sharing is optimal in the case of two agents and several common distortion functions… CONTINUE READING

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