The demand for a risky asset in the presence of a background risk

Research output: Journal PublicationsJournal Article (refereed)

29 Citations (Scopus)

Abstract

We examine the demand for a risky asset in the presence of two risks: a financial risk and a background risk which need not be financial. First, we compute the necessary and sufficient condition for a positive demand for a risky asset, showing that it depends on two terms capturing respectively the direct effect of risk premium and the dependence between the two risks. Second, we develop higher order expectation dependence concept and show that the more information about the sign of higher cross derivatives of the utility function we have, the weaker dependence conditions on distribution we achieve.
Original languageEnglish
Pages (from-to)372-391
Number of pages20
JournalJournal of Economic Theory
Volume146
Issue number1
DOIs
Publication statusPublished - 1 Jan 2011
Externally publishedYes

Fingerprint

Background risk
Assets
Financial risk
Direct effect
Derivatives
Utility function
Risk premium

Keywords

  • Background risk
  • Expectation dependence
  • Risky asset

Cite this

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The demand for a risky asset in the presence of a background risk. / LI, Jingyuan.

In: Journal of Economic Theory, Vol. 146, No. 1, 01.01.2011, p. 372-391.

Research output: Journal PublicationsJournal Article (refereed)

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AB - We examine the demand for a risky asset in the presence of two risks: a financial risk and a background risk which need not be financial. First, we compute the necessary and sufficient condition for a positive demand for a risky asset, showing that it depends on two terms capturing respectively the direct effect of risk premium and the dependence between the two risks. Second, we develop higher order expectation dependence concept and show that the more information about the sign of higher cross derivatives of the utility function we have, the weaker dependence conditions on distribution we achieve.

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KW - Risky asset

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