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Effects of background risks on cautiousness with an application to a portfolio choice problem

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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<mark>Journal publication date</mark>01/2011
<mark>Journal</mark>Journal of Economic Theory
Issue number1
Volume146
Number of pages13
Pages (from-to)346-358
Publication StatusPublished
<mark>Original language</mark>English

Abstract

We provide necessary and sufficient conditions 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.