Insurance with Frequent Trading: A Dynamic Analysis of Efficient Insurance Markets
Universitat Pompeu Fabra Working Paper No. 460
28 Pages Posted: 28 Jul 2000
Date Written: April 2000
This paper extends existing insurance results on the type of insurance contracts needed for insurance market efficiency to a dynamic setting. I extend the notion of insurable risks and define them in terms of the actuarial properties of the underlying risk process (independently of preferences and endowments), including catastrophic events as insurable. Then, taking risks that are insurable, I look at agent's optimal trading behaviour which turns out to be quite natural: agents purchase private insurance on themselves and use fully diversified redundant assets to supply insurance, making the insurance market self-contained.
Keywords: Risk sharing, insurance, complete markets, insurable risks
JEL Classification: D81, D99, G11
Suggested Citation: Suggested Citation