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Research output: Working paper
Research output: Working paper
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TY - UNPB
T1 - Option bounds and second order arbitrage opportunities
AU - Huang, J
PY - 2004
Y1 - 2004
N2 - In this paper we investigate the relationship between risk aversion and cautiousness, two important risk preference measures. We show how high cautiousness is associated with low risk aversion and how bounds and limits of cautiousness imply bounds and limits of relative risk aversion respectively. We also show how the monotonicity of cautiousness implies the monotonicity of risk aversion. Interestingly, we find that decreasing cautiousness implies standard risk aversion. We also reveal a close relationship between cautiousness and relative risk tolerance. These results help us better understand various conditions concerning risk aversion and cautiousness. They may also shed light on how investors' investment decisions in the equity and options markets are related.
AB - In this paper we investigate the relationship between risk aversion and cautiousness, two important risk preference measures. We show how high cautiousness is associated with low risk aversion and how bounds and limits of cautiousness imply bounds and limits of relative risk aversion respectively. We also show how the monotonicity of cautiousness implies the monotonicity of risk aversion. Interestingly, we find that decreasing cautiousness implies standard risk aversion. We also reveal a close relationship between cautiousness and relative risk tolerance. These results help us better understand various conditions concerning risk aversion and cautiousness. They may also shed light on how investors' investment decisions in the equity and options markets are related.
KW - Option bounds
KW - option pricing
KW - stochastic dominance
KW - risk averse
KW - arbitrage opportunities
M3 - Working paper
T3 - Accounting and Finance Working Paper Series
BT - Option bounds and second order arbitrage opportunities
PB - The Department of Accounting and Finance
CY - Lancaster University
ER -