Effects of Background Risks on Cautiousness with an Application to a Portfolio Choice Problem

27 Pages Posted: 17 Jun 2008

See all articles by Chiaki Hara

Chiaki Hara

Kyoto University - Institute of Economic Research

James Huang

Lancaster University - Department of Accounting and Finance

Christoph Kuzmics

University of Graz - Department of Economics

Date Written: June 5, 2008

Abstract

We provide necessary and sufficient conditions on an individual's expected utility function under which any zero-mean idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), which is the key determinant for this individual's demand for options and portfolio insurance.

Keywords: Risk aversion, risk tolerance, cautiousness, portfolio insurance, idiosyncratic risks, background risks, incomplete markets

JEL Classification: D51, D58, D81, G11, G12, G13

Suggested Citation

Hara, Chiaki and Huang, James Xiaoping and Kuzmics, Christoph, Effects of Background Risks on Cautiousness with an Application to a Portfolio Choice Problem (June 5, 2008). Available at SSRN: https://ssrn.com/abstract=1144006 or http://dx.doi.org/10.2139/ssrn.1144006

Chiaki Hara (Contact Author)

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
Japan

James Xiaoping Huang

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
01 5245 93633 (Phone)
01 5248 47321 (Fax)

Christoph Kuzmics

University of Graz - Department of Economics ( email )

Universitaetsstrasse 15
RESOWI - F4
Graz, 8010
Austria

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