Effective Risk Aversion in Thin Risk-Sharing Markets

28 Pages Posted: 1 Apr 2019

See all articles by Michail Anthropelos

Michail Anthropelos

University of Piraeus - Department of Banking and Financial Management

Constantinos Kardaras

London School of Economics & Political Science (LSE)

George Vichos

London School of Economics & Political Science (LSE) - Department of Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2019

Abstract

We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We argue that traders relatively more exposed to the market portfolio tend to behave in a more risk tolerant manner. Noncompetitive equilibrium prices and allocations result as an outcome of a game among traders. General sufficient conditions for existence and uniqueness of such equilibrium are provided, with extensive analysis of two-trader transactions. Even though strategic behaviour causes inefficient social allocations, traders with sufficiently high risk tolerance and/or high initial exposure to tradeable securities obtain more utility gain in the noncompetitive equilibrium, when compared to the competitive one.

Keywords: effective risk aversion, nash equilibrium, noncompetitive risk sharing, thin markets, price impact

JEL Classification: G14, D43

Suggested Citation

Anthropelos, Michail and Kardaras, Constantinos and Vichos, George, Effective Risk Aversion in Thin Risk-Sharing Markets (March 7, 2019). Available at SSRN: https://ssrn.com/abstract=3348999 or http://dx.doi.org/10.2139/ssrn.3348999

Michail Anthropelos (Contact Author)

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Constantinos Kardaras

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

George Vichos

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
22
Abstract Views
309
PlumX Metrics