Download This PaperWhen are Path-Dependent Payoffs Suboptimal?
11 Pages Posted: 8 Dec 2009
Date Written: September 21, 2009
Abstract
Generalizing a result by Cox and Leland (2000) and Vanduffel et al. (2008), this note shows that risk-averse investors with fixed planning horizon prefer path-independent payoffs in any financial market if the pricing kernel is a function of the underlying’s price at the end of the planning horizon. Generally, for every payoff which is not a function of the pricing kernel, there is a more attractive alternative that depends solely on the pricing kernel at the end of the planning horizon.
Keywords: Path dependence, optimal payoff, risk aversion, Esscher transform
Suggested Citation: Suggested Citation
Kassberger, Stefan and Liebmann, Thomas, When are Path-Dependent Payoffs Suboptimal? (September 21, 2009). Available at SSRN: https://ssrn.com/abstract=1476197 or http://dx.doi.org/10.2139/ssrn.1476197
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