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Certainty Equivalent in Capital Markets

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  • Kruschwitz, Lutz
  • Löffler, Andreas

Abstract

We generalize the classical concept of a certainty equivalent to a model where an investor can trade on a capital market with several future trading dates. We show that if a riskless asset is traded and the investor has a CARA utility then our generalized certainty equivalent can be evaluated using the sum of discounted one-period certainty equivalents. This is not true if the investor has a HARA utility.

Suggested Citation

  • Kruschwitz, Lutz & Löffler, Andreas, 2003. "Certainty Equivalent in Capital Markets," Hannover Economic Papers (HEP) dp-272, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-272
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    File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-272.pdf
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    Cited by:

    1. Colin Lizieri & Gianluca Marcato & Paul Ogden & Andrew Baum, 2012. "Pricing Inefficiencies in Private Real Estate Markets Using Total Return Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 774-803, October.

    More about this item

    Keywords

    certainty equivalent; CARA;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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