Risk‐Taking‐Neutral Background Risks

19 Pages Posted: 5 Jun 2018

See all articles by Guenter Franke

Guenter Franke

University of Konstanz - Department of Economics

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

Richard Stapleton

University of Manchester - Division of Accounting and Finance

Date Written: June 2018

Abstract

This article examines how decision making under uncertainty is affected by the presence of a linearly dependent background risk, for individuals with HARA utility. A linearly dependent background risk is a background risk that increases linearly in the chosen tradable outcome. In order to do this, we construct a parametric class of background risks that we label as risk‐taking‐neutral (RTN). These background risks have the property that they will not alter the decision made with respect to the market risk. As such, these RTN background risks provide a benchmark. In many situations, a background risk that is faced by an investor can be compared to one from the RTN class in order to predict qualitative changes in the investor's choice decision. As this benchmark is easily available, it is convenient to use to predict these changes.

Suggested Citation

Franke, Guenter and Schlesinger, Harris and Stapleton, Richard, Risk‐Taking‐Neutral Background Risks (June 2018). Journal of Risk and Insurance, Vol. 85, Issue 2, pp. 335-353, 2018, Available at SSRN: https://ssrn.com/abstract=3189178 or http://dx.doi.org/10.1111/jori.12235

Guenter Franke (Contact Author)

University of Konstanz - Department of Economics ( email )

Fach 147
Konstanz, 78457
Germany
+49 7531 88 2545 (Phone)
+49 7531 88 3559 (Fax)

Harris Schlesinger

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Richard Stapleton

University of Manchester - Division of Accounting and Finance ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

HOME PAGE: http://rstapleton.com/

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