When are path-dependent payoffs suboptimal?
AbstractGeneralizing a result by Cox and Leland (2000) and Vanduffel et al. (2009), this note shows that risk-averse investors with fixed planning horizon prefer path-independent payoffs in any financial market if the pricing kernel is a function of the underlying’s price at the end of the planning horizon. Generally, for every payoff which is not a function of the pricing kernel, there is a more attractive alternative that depends solely on the pricing kernel at the end of the planning horizon.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 36 (2012)
Issue (Month): 5 ()
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Web page: http://www.elsevier.com/locate/jbf
Path dependence; Optimal payoff; Risk aversion; Esscher transform;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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