Multiplicative Background Risk

Günter Franke (), Harris Schlesinger and Richard C. Stapleton ()
Additional contact information
Richard C. Stapleton: University of Manchester, Crawford House, Oxford Road, Manchester, M13 9PL, England

Management Science, 2006, vol. 52, issue 1, 146-153

Abstract: Although there has been much attention in recent years on the effects of additive background risks, the same is not true for its multiplicative counterpart. We consider random wealth of the multiplicative form x\~y\~, where x\~ and y\~ are statistically independent random variables. We assume that x\~ is endogenous to the economic agent but that y\~ is an exogenous and nontradable background risk that represents a type of market incompleteness. Our main focus is on how the presence of the multiplicative background risk y\~ affects risk-taking behavior for decisions on the choice of x\~. We extend the results of Gollier and Pratt (1996) to characterize conditions on preferences that lead to more cautious behavior.

Keywords: affiliated utility function; background risk; diffidence theorem; multiplicative risks; multiplicative risk vulnerability; risk vulnerability (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (63)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1050.0450 (application/pdf)

Related works:
Working Paper: Multiplicative background risk (2003)
Working Paper: Multiplicative background risk (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:52:y:2006:i:1:p:146-153

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().