Does Ambiguity Generate Demand for Options?

Takashi Nishiwaki ()

No 2011, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: This study examinesthe optimal investment strategies for risk-and-ambiguity averse investors and characterizes conditions under which ambiguity induces investors to buy or sell options. Under identical constant relative risk aversion utility functions, we show that ambiguity-averse investors should sell portfolio insurance. In particular, when investors' relative risk aversion is less than or equal to two, ambiguity-averse investors should sell options at any realization values of a reference asset. In addition, if the relative risk aversion is greater than two, we demonstrate that ambiguity-averse investors should sell options at smaller and buy them at higher realization values of the reference portfolio.

Keywords: Ambiguity; Multiple prior model; Options demand; Kullback-Leibler divergence (search for similar items in EconPapers)
JEL-codes: G11 G22 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020-09
New Economics Papers: this item is included in nep-ias, nep-mic and nep-upt
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Working Paper: Does Ambiguity Generate Demand for Options? (2021)
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