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Risk Aversion, Foreign Exchange Speculation and Gambler's Ruin

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  • Carlson, J.A.

Abstract

The apparent persistence of unexploited opportunities for expected profits in foreign exchange markets suggests highly risk‐averse market participants. Financial institutions put tight limits on the foreign‐exchange positions they may have at risk at any time, despite beliefs that the odds are favourable that the positions will be profitable. This ‘safety‐first’ practice is consistent with keeping the probability of ruin low enough to be of no practical concern. The setting of a very low probability of ruin for prudential reasons provides a rationale for traders behaving as if they have a degree of risk aversion that might otherwise seem implausibly high.
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Suggested Citation

  • Carlson, J.A., 1993. "Risk Aversion, Foreign Exchange Speculation and Gambler's Ruin," Papers 93-103, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
    • Handle: RePEc:fth:purkib:93-103
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    Cited by:

    1. Laséen, Stefan, 2000. "Nominal Wage Contracts, Aggregate and Firm-Specific Uncertainty – How High is the Private Gain from Indexation?," Working Paper Series 2000:11, Uppsala University, Department of Economics.
    2. Carlson, J.A: Osler, C.L., 1998. "Determinants of Currency Risk Premiums," Papers 98-006, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).

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    Keywords

    financial market ; risk;

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