A new risk measure customized for individual investors

25 Pages Posted: 13 Jul 2021 Last revised: 7 Sep 2021

See all articles by Linjia Dong

Linjia Dong

Southern University of Science and Technology; Harbin Institute of Technology

Zhaojun Yang

Southern University of Science and Technology - Department of Finance

Date Written: September 5, 2021

Abstract

FinTech makes numerous financial products accessible to common investors but up to now, there is no risk measure method specially customized for common investors instead of financial institutions which are generally too big to fail. This paper develops a hedging-based utility risk measure (HBU) theory. We show that HBU is a convex risk measure and if the utility has a constant relative risk aversion coefficient, HBU is also coherent. Roughly speaking, HBU is the opposite of a generalized utility indifference price. HBU depends on claimants' utility and the hedging instruments accessible to them and thus it is a personal (subjective) risk measure especially suitable for common investors who need to have a comprehensive risk evaluation of a financial product.

Keywords: Risk measures; Personal risk measures; Hedging risk; Utility indifference prices.

JEL Classification: G12, H81, G31

Suggested Citation

Dong, Linjia and Yang, Zhaojun, A new risk measure customized for individual investors (September 5, 2021). Available at SSRN: https://ssrn.com/abstract=3884285 or http://dx.doi.org/10.2139/ssrn.3884285

Linjia Dong

Southern University of Science and Technology ( email )

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China

Harbin Institute of Technology ( email )

92 Xidazhi Street
Harbin, 150001
China

Zhaojun Yang (Contact Author)

Southern University of Science and Technology - Department of Finance ( email )

No 1088, Xueyuan Rd.
District of Nanshan
Shenzhen, Guangdong 518055
China

HOME PAGE: http://faculty.sustc.edu.cn/profiles/yangzj

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