Katholieke Universiteit Leuven - Department of Applied Economics
University of Amsterdam - Amsterdam School of Economics (ASE)
August 4, 2011
Abstract: In this article, we show, in the context of partial hedging, that some important relationships about comonotonicity and convex order cannot be translated to counter-monotonicity in general because of the possibility of over-hedging. We propose a new notion called proper hedge that can eeffectively avoid over-hedging. Different characterizations of a proper hedge are given, and we show that this notion is useful in translating relationship between comonotonicity and convex order to the case of counter-comonotonicity.
As an application, we apply our results to identify desirable structural properties of insurance indemnities that make an insurance contract appealing to both the policyholder and the insurer.