Michael Ludkovski (UCSB)

Title: Optimal Risk Sharing under Distorted Probabilities

Abstract: We study optimal risk sharing among n agents endowed with distortion risk measures. Risk sharing under third-party constraints is also considered. We obtain an explicit formula for Pareto optimal allocations. In particular, we find that a stop-loss or deductible risk sharing is optimal in the case of two agents and several common distortion functions. This extends recent result of Jouini et al. (2006) to the problem with unbounded risks and market frictions.

In the first part of my talk I will give a brief survey of distortion risk measures and its relation to other risk preferences. I will then
discuss recent research and open problems.