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Increases in risk aversion and the distribution of portfolio payoffs

  • Dybvig, Philip H.
  • Wang, Yajun

Oliver Hart proved the impossibility of deriving general comparative static properties in portfolio weights. Instead, we derive new comparative statics for the distribution of payoffs: A is less risk averse than B iff Aʼs payoff is always distributed as Bʼs payoff plus a non-negative random variable plus conditional-mean-zero noise. If either agent has nonincreasing absolute risk aversion, the non-negative part can be chosen to be constant. The main result also holds in some incomplete markets with two assets or two-fund separation, and in multiple periods for a mixture of payoff distributions over time (but not at every point in time).

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 147 (2012)
Issue (Month): 3 ()
Pages: 1222-1246

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Handle: RePEc:eee:jetheo:v:147:y:2012:i:3:p:1222-1246
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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