Paper #365

Title:

Insurance with frequent trading

Author:

José Penalva

Date:

October 1997 (Revised: March 1999)

Abstract:

This paper looks at the dynamic management of risk in an economy with discrete time consumption and endowments and continuous trading. I study how agents in such an economy deal with all the risk in the economy and attain their Pareto optimal allocations by trading in a few natural securities: private insurance contracts and a common set of derivatives on the aggregate endowment. The parsimonious nature of the implied securities needed for Pareto optimality suggests that in such contexts complete markets is a very reasonable assumption.

Keywords:

Risk-sharing, insurance, hedging, point-processes, complete markets, general equilibrium

JEL codes:

D81, D99, G11

Area of Research:

Finance and Accounting

Published in:

Review of Economic Dynamics 4 (2001), pp. 790-822
With the title:
Insurance with Frequent Trading: A Dynamic Analysis of Efficient Insurance Markets

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