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Inf-convolution of risk measures and optimal risk transfer

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  • Pauline Barrieu
  • Nicole El Karoui

Abstract

We develop a methodology for optimal design of financial instruments aimed to hedge some forms of risk that is not traded on financial markets. The idea is to minimize the risk of the issuer under the constraint imposed by a buyer who enters the transaction if and only if her risk level remains below a given threshold. Both agents have also the opportunity to invest all their residual wealth on financial markets, but with different access to financial investments. The problem is reduced to a unique inf-convolution problem involving a transformation of the initial risk measures. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Pauline Barrieu & Nicole El Karoui, 2005. "Inf-convolution of risk measures and optimal risk transfer," Finance and Stochastics, Springer, vol. 9(2), pages 269-298, April.
    • Handle: RePEc:spr:finsto:v:9:y:2005:i:2:p:269-298
    DOI: 10.1007/s00780-005-0152-0
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