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The Valuation of Nonsystematic Risks and the Pricing of Swedish Lottery Bonds

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  • Green, Richard C
  • Rydqvist, Kristian

Abstract

Swedish government lottery bonds have coupon payments determined by lottery. They offer a unique opportunity to study a security with uncertain payoffs having a known, observable distribution. The risk associated with the lotteries is idiosyncratic by construction and should not command a risk premium in equilibrium. The bonds are traded in two forms, allowing us to evaluate the rewards to bearing extra lottery risk. Despite its idiosyncratic nature, we find prices appear to reflect aversion to this risk. We evaluate the empirical determinants of this differential pricing and possible explanations for it. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 10 (1997)
Issue (Month): 2 ()
Pages: 447-80

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Handle: RePEc:oup:rfinst:v:10:y:1997:i:2:p:447-80

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Cited by:
  1. Chitru S. Fernando & Richard J. Herring, 2001. "Liquidity Shocks, Systemic Risk, and Market Collapse: Theory and Application to the Market for Perps," Center for Financial Institutions Working Papers 01-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2000. "Does Arbitrage Flatten Demand Curves for Stocks?," Yale School of Management Working Papers ysm152, Yale School of Management, revised 01 Nov 2001.
  3. Mauro Guillén & Adrian Tschoegl, 2002. "Banking on Gambling: Banks and Lottery-Linked Deposit Accounts," Journal of Financial Services Research, Springer, vol. 21(3), pages 219-231, June.
  4. Rountree, Brian & Weston, James P. & Allayannis, George, 2008. "Do investors value smooth performance?," Journal of Financial Economics, Elsevier, vol. 90(3), pages 237-251, December.

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