THE DEMAND FOR A RISKY ASSET: SIGNING, JOINTLY AND SEPARATELY, THE EFFECTS OF THREE DISTRIBUTIONAL SHIFTS

Thomas Paulsson, Robert Sproule and Andreas Wagener

Metroeconomica, 2005, vol. 56, issue 2, 221-232

Abstract: We show that, if an individual's utility function exhibits a degree of relative temperance smaller than one, the individual will react, in a plausible way, to each of three common shifts in the stochastic distribution of his wealth, namely to FSD shifts, mean‐preserving spreads and increases in downside risk. First, we derive, in a unified setting, necessary and sufficient conditions for signing the comparative‐static effects of each of these shifts separately, and, second, we invoke implications of the property of mixed risk aversion to merge these separate conditions into a single sufficient condition for jointly signing all comparative‐static effects.

Date: 2005
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