Physical Picture of the Insurance Market

TL;DR

This paper applies concepts from statistical mechanics to analyze wealth distribution in financial markets, identifying different regimes and deriving Pareto-like distributions for small markets.

Contribution

It introduces a novel analogy between wealth distribution and Boltzmann/Tsallis statistics, providing a new method for computing insurance premiums based on surplus averaging.

Findings

Wealth distribution follows a Pareto law in small markets.

Tsallis entropic index distinguishes different market regimes.

A new premium calculation method is proposed.

Abstract

We find the wealth distribution for an economic agent in the financial market, in analogy with standard derivation of generaliz Boltzman (Tsallis) factor in statistical mechanics. In this respect, Tsallis entropic index separates two different regimes, the large and small size market. The Pareto like wealth distribution is obtained in the case of small size market. A method for computing the premium is suggested based on the surplus average vanishing.