Forward Exponential Performances: Pricing and Optimal Risk Sharing

In a Markovian stochastic volatility model, we consider financial agents whose investment criteria are modelled by forward exponential performance processes. The problem of contingent claim indifference valuation is first addressed and a number of properties are proved and discussed. Special attention is given to the comparison between the forward exponential and the backward exponential utility indifference valuation. In addition, we construct the problem of optimal risk sharing in this forward setting and solve it when the agents' forward performance criteria are exponential.Comment: 29 page

Strategy-proofness versus efficiency in exchange economies: General domain properties and applications

We identify general domain properties that induce the non-existence of efficient, strategy-proof, and non-dictatorial rules in the 2-agent exchange economy. Applying these properties, we establish impossibility results in several restricted domains; for example, the intertemporal exchange problem (without saving technology) with preferences represented by the discounted sum of a temporal utility function, the "risk sharing problem" with risk averse expected utility preferences, the CES-preference domain, etc. None of the earlier studies applies to these examples

La Crema: A Case Study of Mutual Fire Insurance

We analyze a mutual fire insurance mechanism used in Andorra, which is called La Crema in the local language. This mechanism relies on households' announced property values to determine how much a household is reimbursed in the case of a fire and how payments are apportioned among other households. The only Pareto-efficient al- location reachable through the mechanism requires that all house- holds honestly report the true value of their property. However, such honest reporting is not an equilibrium except in the extreme case in which the property values are identical for all households. Neverthe- less, as the size of the society becomes large, the benefits from devi- ating from truthful reporting vanish, and all the nondegenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.Publicad

Self-selection and risk sharing in a modern world of life-long annuities

Communicating a pension product well is as important as optimising the financial value. In a recent study, we showed that up to 80% of the value of a pension lump sum could be lost if customer communication failed. In this paper, we extend the simple customer interaction of the earlier contribution to the more challenging lifetime annuity case. Using a simple mobile phone device, the pension customer can select the life-long optimal investment strategy within minutes. The financial risk trade-off is presented as a trade-off between the pension paid and the number of years the life-long annuity is guaranteed. The pension payment decreases when investment security increases. The necessary underlying mathematical financial hedging theory is included in the stud

The Role of Information in Building Reputation in an Investment/Trust Game

This article analyses the role of information in building reputation in an investment/trust game. The model allows for information asymmetry in a finitely repeated sender-receiver game and solves for sequential equilibrium to show that if there are some trustworthy managers who always disclose their private information and choose to return a fair proportion of the firm's income as dividend to the investor, then a rational manager will mimic such behaviour in an attempt to earn a reputation for being trustworthy. The rational manager will mimic with probability 1 in the early periods of the game. The investor, too, will invest with probability 1 in these periods. However, in the later periods, the rational manager will mimic with a certain probability strictly less than 1. The probability will be such that it will make the investor indifferent between investing and not investing, and he, in turn, will invest with a probability (strictly less than 1) that will make the rational manager indifferent between mimicking and not mimicking; that is, the game will begin with pure-strategy play but will switch to mixed-strategy play. There is one exception, though: when the investor's ex ante beliefs about the manager's trustworthiness are exceptionally high, the game will continue in a pure strategy, and the switch to mixed-strategy play will never occur. Identical results obtain if the manager's choice of whether to share his private information with the investor is replaced by exogenously imposed information sharing. © 2013 Copyright European Accounting Association