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Effects of Background Risks on Cautiousness with an Application to a Portfolio Choice Problem
2008
Social Science Research Network
Preserved Fulltext
We provide a necessary and a sufficient condition 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. JEL Classification Codes: D51, D58, D81, G11, G12, G13.
doi:10.2139/ssrn.1144006
fatcat:i5v5qnpqnjfxdljknfek5fqzui