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

See all articles by Richard C. Green

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business

Kristian Rydqvist

State University of New York at Binghamton - School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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

Green, Richard C. and Rydqvist, Kristian, The Valuation of Non-Systematic Risks and the Pricing of Swedish Lottery Bonds. REVIEW OF FINANCIAL STUDIES, Vol. 10, No. 2, Available at SSRN: https://ssrn.com/abstract=8308

Richard C. Green (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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Kristian Rydqvist

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-2673 (Phone)
607-777-4422 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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