The Valuation of Non-Systematic Risks and the Pricing of Swedish Lottery Bonds
REVIEW OF FINANCIAL STUDIES, Vol. 10, No. 2
Posted: 23 Apr 1997
Abstract
Swedish government lottery bonds have coupon payments determined by lottery. They offer a unique opportunity to study a security with uncertain payoffs having a known, observable distribution. The risk associated with the lotteries is by construction idiosyncratic, and should not command a risk premium in equilibrium. The bonds are traded in two forms, allowing us to evaluate the rewards to bearing extra lottery risk. Despite its idiosyncratic nature, we find prices appear to reflect aversion to this risk. We evaluate the empirical determinants of this differential pricing and possible explanations for it.
JEL Classification: G12
Suggested Citation: Suggested Citation
Richard C. Green (Contact Author)
Carnegie Mellon University - David A. Tepper School of Business ( email )
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