The demand for a risky asset in the presence of a background risk

Jingyuan Li

Journal of Economic Theory, 2011, vol. 146, issue 1, 372-391

Abstract: We examine the demand for a risky asset in the presence of two risks: a financial risk and a background risk which need not be financial. First, we compute the necessary and sufficient condition for a positive demand for a risky asset, showing that it depends on two terms capturing respectively the direct effect of risk premium and the dependence between the two risks. Second, we develop higher order expectation dependence concept and show that the more information about the sign of higher cross derivatives of the utility function we have, the weaker dependence conditions on distribution we achieve.

Keywords: Risky; asset; Background; risk; Expectation; dependence (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:1:p:372-391

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