Standard Risk Aversion and the Demand for Risky Assets in the Presence of Background Risk

26 Pages Posted: 3 Nov 2008

See all articles by G unter Franke

G unter Franke

affiliation not provided to SSRN

R.C Stapleton

affiliation not provided to SSRN

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Date Written: March 1999

Abstract

We consider the demand for state contingent claims in the presence of a zeromean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she reacts to an increase in background risk by choosing a demand function for contingent claims with a smaller slope. We show that the conditions for standard risk aversion: positive, declining absoluterisk aversion and prudence are necessary and sufficient for generalized risk aversion. We also derive a necessary and sufficient condition for the agent's derived risk aversion to increase with a simple increase in background risk.

Suggested Citation

Franke, G unter and Stapleton, R.C and Subrahmanyam, Marti G., Standard Risk Aversion and the Demand for Risky Assets in the Presence of Background Risk (March 1999). NYU Working Paper No. FIN-00-011, Available at SSRN: https://ssrn.com/abstract=1294631

G unter Franke (Contact Author)

affiliation not provided to SSRN

No Address Available

R.C Stapleton

affiliation not provided to SSRN

No Address Available

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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