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CORR
2007
Springer

Risk Minimization and Optimal Derivative Design in a Principal Agent Game

13 years 10 months ago
Risk Minimization and Optimal Derivative Design in a Principal Agent Game
We consider the problem of Adverse Selection and optimal derivative design within a Principal-Agent framework. The principal’s income is exposed to non-hedgeable risk factors arising, for instance, from weather or climate phenomena. She evaluates her risk using a coherent and law invariant risk measure and tries minimize her exposure by selling derivative securities on her income to individual agents. The agents have mean-variance preferences with heterogeneous risk aversion coefficients. An agent’s degree of risk aversion is private information and hidden from the principal who only knows the overall distribution. We show that the principal’s risk minimization problem has a solution and illustrate the effects of risk transfer on her income by means of two specific examples. Our model extends earlier work of Barrieu and El Karoui (2005) and Carlier, Ekeland and Touzi (2007). Preliminary - Comments Welcome AMS classification: 60G35, 60H20, 91B16, 91B70.
U. Horst, S. Moreno
Added 13 Dec 2010
Updated 13 Dec 2010
Type Journal
Year 2007
Where CORR
Authors U. Horst, S. Moreno
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