Risk and Derivative Price
AbstractWe consider an asset market traded three types of assets: the risk–free asset, the market portfolio and derivatives written on the market portfolio return. We determine a sufficient condition to guarantee that noise risk monotonically changes their derivatives. The condition is that Arrow–Pratt absolute risk aversion is decreasing and convex.
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Bibliographic InfoPaper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WP2R07.
Date of creation: Mar 2007
Date of revision:
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Derivative price; Noise risk; Nonlineality; Risk aversion;
Find related papers by JEL classification:
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-FMK-2007-11-17 (Financial Markets)
- NEP-UPT-2007-11-17 (Utility Models & Prospect Theory)
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