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Background risk and the demand for state-contingent claims

Günter Franke (), Richard Stapleton () and Marti Subrahmanyam ()

Economic Theory, 2004, vol. 23, issue 2, 321-335

Abstract: We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in background risk. We show that the conditions for standard risk aversion, that is positive, declining absolute risk aversion and prudence, are necessary and sufficient for generalized risk aversion. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Background risk; Precautionary premium; Demand for tradable risk. (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1007/s00199-003-0368-1

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