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

26 Pages Posted: 12 Nov 2008

See all articles by Gunter Franke

Gunter Franke

affiliation not provided to SSRN

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Date Written: March 1999

Abstract

We consider the demand for state contingent claims in the presence of a zero-mean, 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 absolute risk 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, Gunter and Stapleton, Richard 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. S-MF-99-02. Available at SSRN: https://ssrn.com/abstract=1300254

Gunter Franke (Contact Author)

affiliation not provided to SSRN

No Address Available

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 1524 381 172 (Phone)
+44 1524 846874 (Fax)

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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