A new risk measure customized for individual investors
25 Pages Posted: 13 Jul 2021 Last revised: 7 Sep 2021
Date Written: September 5, 2021
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
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