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|Title: ||The Size of Background Risk and the Theory of Risk Bearing|
|Authors: ||Franke, Gunter|
Stapleton, Richard C.
Subrahmanyam, Marti G.
|Issue Date: ||Dec-1994 |
|Series/Report no.: ||FIN-94-034|
|Abstract: ||We establish a necessary and sufficient condition for the risk aversion
of an agent’s derived utility function to increase with
independent, zero-mean background risk. This condition is weaker than
standard risk aversion. For small risks, the condition is that the ratio
of the third to the first derivative of the utility function is
decreasing in income. In a market with state-contingent marketable
claims, an increase in background risk, which raises the agent’s
derived risk aversion, reduces the slope of the agent’s optimal
sharing rule. Under a weak aggregation condition. An increase of
background risk for many agents I n the economy raises the prices of
marketable claims in states with a low level of marketable aggregate
income relative to the prices in states with a higher level of such income.|
|Appears in Collections:||Finance Working Papers|
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