Asset Prices and Changes in Risk within a Bivariate Model

Octave Jokung-Nguena and Sovan Mitra
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Octave Jokung-Nguena: IDP - Institut du Développement et de la Prospective - EA 1384 - UVHC - Université de Valenciennes et du Hainaut-Cambrésis - IAE - Institut d'Administration des Entreprises - UPHF - Université Polytechnique Hauts-de-France

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Abstract: This paper analyzes the effect on the price of the risky asset for both global and marginal changes, in dependent, independent, exogenous and endogenous risks. We find that global changes induce riskier behavior and decrease market prices when the utility function exhibits generalized relative risk aversions less than their benchmark values. Marginal changes in the endogenous risk decrease the market prices when all the coefficients of generalized relative risk aversion to the endogenous risk are less than their orders. Marginal changes in the exogenous risk decrease the price of the risky asset, when all the coefficients of generalized risk aversion to the exogenous risk are less than one. Positive dependence induces a decrease in the market price whereas negative dependence causes an increase in the same price. Furthermore, increasing the correlation between the two risks leads to the fall in the price of the risky asset, when the utility function of the representative investor exhibits pair-wise risk aversion. We recover the results concerning the univariate framework with additive background risk.

Keywords: Monotonicity; Background risk; Increase in risk; Pair-wise risk aversion; Risk aversion; Correlation (search for similar items in EconPapers)
Date: 2019-03
Note: View the original document on HAL open archive server: https://uphf.hal.science/hal-03699128v1
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Published in Asia-Pacific Financial Markets, 2019, 26 (1), pp.47-60. ⟨10.1007/s10690-018-9255-4⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03699128

DOI: 10.1007/s10690-018-9255-4

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