Cooperative investment in incomplete markets under financial fairness
Pazdera,Jaroslav Schumacher,Hans Werker,Bas J. M.
Pazdera,Jaroslav
Schumacher,Hans
Werker,Bas J. M.
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.
Description
Date
2016-11
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
risk sharing, cooperative investment, incomplete markets, financial fairness, syndicates
Citation
Pazdera, J, Schumacher, H & Werker, B J M 2016, 'Cooperative investment in incomplete markets under financial fairness', Insurance Mathematics & Economics, vol. 71, pp. 394-406. https://doi.org/10.1016/j.insmatheco.2016.10.008
License
info:eu-repo/semantics/closedAccess