Risk exchange under infinite-mean Pareto models
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Date
2025-09
Publication Type
Journal Article
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yes
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Abstract
We study the optimal decisions and equilibria of agents who aim to minimize their risks by allocating their positions over extremely heavy-tailed (i.e., infinite-mean) and possibly dependent losses. The loss distributions of our focus are super-Pareto distributions, which include the class of extremely heavy-tailed Pareto distributions. Using a recent result on stochastic dominance, we show that for a portfolio of super-Pareto losses, non-diversification is preferred by decision makers equipped with well-defined and monotone risk measures. The phenomenon that diversification is not beneficial in the presence of super-Pareto losses is further illustrated by an equilibrium analysis in a risk exchange market. First, agents with super-Pareto losses will not share risks in a market equilibrium. Second, transferring losses from agents bearing super-Pareto losses to external parties without any losses may arrive at an equilibrium which benefits every party involved.
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published
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Journal / series
Volume
124
Pages / Article No.
103131
Publisher
Elsevier
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Edition / version
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Subject
Super-Pareto distributions; Diversification; Risk exchange; Equilibrium; Risk measures
Organisational unit
02204 - RiskLab / RiskLab