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Effects of Background Risks on Cautiousness with an Application to a Portfolio Choice Problem

Author

Listed:
  • Hara, Chiaki
  • 原, 千秋
  • ハラ, チアキ
  • Huang, James
  • Kuzmics, Christoph

Abstract

We provide a necessary and a sufficient condition on an individual's expected utility function under which any zero-mean idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), which is the key determinant for this individual's demand for options and portfolio insurance.

Suggested Citation

  • Hara, Chiaki & 原, 千秋 & ハラ, チアキ & Huang, James & Kuzmics, Christoph, 2008. "Effects of Background Risks on Cautiousness with an Application to a Portfolio Choice Problem," PIE/CIS Discussion Paper 368, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:piecis:368
    Note: March 31, 2008 -- Title page
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    Citations

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    Cited by:

    1. Wang, Chuhong & Liu, Xingfei & Tani, Massimiliano & Zhao, Yan, 2025. "Safety nets and investment choices," Emerging Markets Review, Elsevier, vol. 68(C).
    2. 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.
    3. Christian Gollier & Miles S. Kimball, 2018. "Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(2), pages 397-430, June.
    4. 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.
    5. Huang, James, 2014. "Convex and decreasing absolute risk aversion is proper," Economics Letters, Elsevier, vol. 125(1), pages 123-125.
    6. Huang, Xiaoxia & Yang, Tingting, 2020. "How does background risk affect portfolio choice: An analysis based on uncertain mean-variance model with background risk," Journal of Banking & Finance, Elsevier, vol. 111(C).
    7. Huang, Xiaoxia & Di, Hao, 2016. "Uncertain portfolio selection with background risk," Applied Mathematics and Computation, Elsevier, vol. 276(C), pages 284-296.
    8. Guo, Xu & Wong, Wing-Keung & Zhu, Lixing, 2013. "An analysis of portfolio selection with multiplicative background risk," MPRA Paper 51331, University Library of Munich, Germany.

    More about this item

    Keywords

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    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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