New study reveals how financial markets shape risk management strategies
Risk averse agents trade financial securities in a competitive market called a risk market. Using risk measures, prices for securities form a probability density function. This leads to a new type of equilibrium under uncertainty, where the most risk neutral agent emerges. The endogenous price of risk is the worst case scenario for the most risk neutral agent and each individual agent. Risk markets can be used in decision making models like Nash games, where agents optimize their actions under uncertainty.