Uncertainty in Artificial Intelligence
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Compact Securities Markets for Pareto Optimal Reallocation of Risk
David Pennock, Michael Wellman
Abstract:
The emph{securities market} is the fundamental theoretical framework in economics and finance for resource allocation under uncertainty. Securities serve both to reallocate risk and to disseminate probabilistic information. emph{Complete} securities markets---which contain one security for every possible state of nature---support Pareto optimal allocations of risk. Complete markets suffer from the same exponential dependence on the number of underlying events as do joint probability distributions. We examine whether markets can be structured and ``compacted'' in the same manner as Bayesian network representations of joint distributions. We show that, if all agents' risk-neutral independencies agree with the independencies encoded in the market structure, then the market is emph{operationally complete}: risk is still Pareto optimally allocated, yet the number of securities can be exponentially smaller. For collections of agents of a certain type, agreement on Markov independencies is sufficient to admit compact and operationally complete markets.
Keywords: compact and operationally complete securities markets, risk allocation, Bayesian netw
Pages: 481-488
PS Link: http://www.neci.nj.nec.com/homepages/dpennock/papers/compact-markets-uai-00.ps
PDF Link: /papers/00/p481-pennock.pdf
BibTex:
@INPROCEEDINGS{Pennock00,
AUTHOR = "David Pennock and Michael Wellman",
TITLE = "Compact Securities Markets for Pareto Optimal Reallocation of Risk",
BOOKTITLE = "Proceedings of the Sixteenth Conference Annual Conference on Uncertainty in Artificial Intelligence (UAI-00)",
PUBLISHER = "Morgan Kaufmann",
ADDRESS = "San Francisco, CA",
YEAR = "2000",
PAGES = "481--488"
}


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