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Cautiousness and tendency to buy options

Research output: Working paper

Published
Publication date2004
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
Original languageEnglish

Publication series

NameAccounting and Finance Working Paper Series

Abstract

As is well known, Arrow-Pratt measure of risk aversion explains investors’ behavior in stock markets while Kimball’s measure of prudence explains investors’ behavior when they make precautionary savings. What is missing is a measure of investors’ tendency to buy options. In this paper we show that cautiousness, which is equivalent to the ratio of prudence to risk aversion, is the measure. We also discuss some properties of this measure.