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When are path-dependent payoffs suboptimal?

Stefan Kassberger and Thomas Liebmann

Journal of Banking & Finance, 2012, vol. 36, issue 5, 1304-1310

Abstract: Generalizing a result by Cox and Leland (2000) and Vanduffel et al. (2009), this note shows that risk-averse investors with fixed planning horizon prefer path-independent payoffs in any financial market if the pricing kernel is a function of the underlying’s price at the end of the planning horizon. Generally, for every payoff which is not a function of the pricing kernel, there is a more attractive alternative that depends solely on the pricing kernel at the end of the planning horizon.

Keywords: Path dependence; Optimal payoff; Risk aversion; Esscher transform (search for similar items in EconPapers)
JEL-codes: G11 G13 (search for similar items in EconPapers)
Date: 2012
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