Do Investors Need Kink to Cope with Ambiguity?

Takashi Nishiwaki ()

International Review of Economics & Finance, 2020, vol. 70, issue C, 391-397

Abstract: This study proposes a possible explanation for demand for derivatives that have kinks, such as plain vanilla options, using a market equilibrium model. In our setting, there is one risky asset and one ambiguous additive background risk, and a complete market exists for the risky asset. Under this environment, the optimal payoff function for an ambiguity-averse investor who has an exponential utility function exhibits kinks.

Keywords: Ambiguity; Multiple prior model; Background risk; Kink (search for similar items in EconPapers)
JEL-codes: G11 G22 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:70:y:2020:i:c:p:391-397

DOI: 10.1016/j.iref.2020.08.001

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