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Background risk and the demand for state-contingent claims

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Author Info

  • Guenter Franke

    ()

  • Richard Stapleton

    ()

  • Marti Subrahmanyam

    ()

Abstract

We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in background risk. We show that the conditions for standard risk aversion, that is positive, declining absolute risk aversion and prudence, are necessary and sufficient for generalized risk aversion. Copyright Springer-Verlag Berlin/Heidelberg 2004

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File URL: http://hdl.handle.net/10.1007/s00199-003-0368-1
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 23 (2004)
Issue (Month): 2 (January)
Pages: 321-335

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Handle: RePEc:spr:joecth:v:23:y:2004:i:2:p:321-335

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Related research

Keywords: Background risk; Precautionary premium; Demand for tradable risk.;

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Cited by:
  1. Broll, Udo & Wahl, Jack E., 2009. "Liquidity constrained exporters: Trade and futures hedging," Dresden Discussion Paper Series in Economics 17/09, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  2. Huang, Hung-Hsi & Wang, Ching-Ping, 2013. "Portfolio selection and portfolio frontier with background risk," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 177-196.
  3. Broll, Udo & Wahl, Jack E., 2011. "Liquidity constrained exporters and trade," Economics Letters, Elsevier, vol. 111(1), pages 26-29, April.
  4. Bardsley, Peter & Burfurd, Ingrid, 2009. "Contract Design for Biodiversity Procurement," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia, Australian Agricultural and Resource Economics Society 48047, Australian Agricultural and Resource Economics Society.
  5. Dana, Rose-Anne & Scarsini, Marco, 2007. "Optimal risk sharing with background risk," Journal of Economic Theory, Elsevier, vol. 133(1), pages 152-176, March.
  6. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2010. "An analysis of portfolio selection with background risk," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3055-3060, December.

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