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Background risk and the demand for state-contingent claims

Author

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  • Guenter Franke

    ()

  • Richard Stapleton

    ()

  • Marti Subrahmanyam

    ()

Abstract

We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in background risk. We show that the conditions for standard risk aversion, that is positive, declining absolute risk aversion and prudence, are necessary and sufficient for generalized risk aversion. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Guenter Franke & Richard Stapleton & Marti Subrahmanyam, 2004. "Background risk and the demand for state-contingent claims," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(2), pages 321-335, January.
  • Handle: RePEc:spr:joecth:v:23:y:2004:i:2:p:321-335
    DOI: 10.1007/s00199-003-0368-1
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    Citations

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    Cited by:

    1. George Wong, 2009. "Does the More Risk‐Averse Investor hold a Less Risky Portfolio?," International Review of Finance, International Review of Finance Ltd., vol. 9(3), pages 319-333, September.
    2. Dana, Rose-Anne & Scarsini, Marco, 2007. "Optimal risk sharing with background risk," Journal of Economic Theory, Elsevier, vol. 133(1), pages 152-176, March.
    3. Matthias Pelster, 2015. "Marketable and non-hedgeable risk in a duopoly framework with hedging," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(4), pages 697-716, October.
    4. Huang, Hung-Hsi & Wang, Ching-Ping, 2013. "Portfolio selection and portfolio frontier with background risk," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 177-196.
    5. Broll, Udo & Wahl, Jack E., 2011. "Liquidity constrained exporters and trade," Economics Letters, Elsevier, vol. 111(1), pages 26-29, April.
    6. Peter Bardsley & Ingrid Burfurd, 2013. "Auctioning contracts for environmental services," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(2), pages 253-272, April.
    7. Broll, Udo & Wahl, Jack E., 2009. "Liquidity constrained exporters: Trade and futures hedging," Dresden Discussion Paper Series in Economics 17/09, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    8. repec:dau:papers:123456789/698 is not listed on IDEAS
    9. Peter Bardsley & Ingrid Burfurd, 2008. "Contract Design for Biodiversity Procurement," Department of Economics - Working Papers Series 1031, The University of Melbourne.
    10. Mickael Beaud & Marc Willinger, 2015. "Are People Risk Vulnerable?," Management Science, INFORMS, vol. 61(3), pages 624-636, March.
    11. James Huang & Richard Stapleton, 2017. "Higher-order risk vulnerability," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(2), pages 387-406, February.
    12. Huang, James, 2014. "Convex and decreasing absolute risk aversion is proper," Economics Letters, Elsevier, vol. 125(1), pages 123-125.
    13. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2010. "An analysis of portfolio selection with background risk," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3055-3060, December.

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