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The Valuation of Contingent Claims Markets

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  • Schlee, Edward E
  • Schlesinger, Harris

Abstract

This article studies an agent's valuation of the right to trade in a complete contingent claims market. The proposed measure generalizes the Pratt(1964) risk premium, which captures the willingness to pay to replace a given risky wealth prospect with an actuarially equivalent, nonrisky wealth. Specifically, we define a generalized risk premium to be the willingness to pay to trade at going market prices. If state prices are actuarially fair, the Pratt premium is obtained as a special case. We derive several properties of this generalized premium and note its relationship to the option price of a public project under uncertainty. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • Schlee, Edward E & Schlesinger, Harris, 1993. "The Valuation of Contingent Claims Markets," Journal of Risk and Uncertainty, Springer, vol. 6(1), pages 19-31, January.
  • Handle: RePEc:kap:jrisku:v:6:y:1993:i:1:p:19-31
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    References listed on IDEAS

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    1. Richard E. Quandt, 1986. "Betting and Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 101(1), pages 201-207.
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    8. James Sundali & Rachel Croson, 2006. "Biases in casino betting: The hot hand and the gambler's fallacy," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 1, pages 1-12, July.
    9. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    10. Terrell, Dek & Farmer, Amy, 1996. "Optimal Betting and Efficiency in Parimutuel Betting Markets with Information Costs," Economic Journal, Royal Economic Society, vol. 106(437), pages 846-868, July.
    11. Camerer, Colin, 1996. "Can Asset Markets be Manipulated? A Field Experiment with Racetrack Betting," Working Papers 983, California Institute of Technology, Division of the Humanities and Social Sciences.
    12. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
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    Cited by:

    1. Robert F. Nau, 2003. "A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility," Management Science, INFORMS, vol. 49(8), pages 1089-1104, August.

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