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|Title: ||Standard Risk Aversion and the Demand for Risky Assets in the Presence
of Background Risk|
|Authors: ||Franke, Gunter|
Stapleton, Richard C.
Subrahmanyam, Marti G.
|Issue Date: ||30-Mar-1999 |
|Series/Report no.: ||S-MF-99-02|
|Abstract: ||We consider the demand for state contingent claims in the presence of a
zero-mean, non-hedgeable background risk. An agent is defined to be
generalized risk averse if he/she reacts to an increase in background
risk by choosing a demand function for contingent claims with a smaller
slope. We show that the conditions for standard risk aversion: positive,
declining absolute risk aversion and prudence are necessary and
sufficient for generalized risk aversion. We also derive a necessary and
sufficient condition for the agent's derived risk aversion to increase
with a simple increase in background risk.|
|Appears in Collections:||Macro Finance|
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