TY - JOUR

T1 - Cautiousness, skewness preference, and demand for options

AU - Huang, James

AU - Stapleton, Richard

PY - 2014/10

Y1 - 2014/10

N2 - In this article we establish cautiousness as a new downside risk aversion measure, using a portfolio problem with a risk-free bond, a stock, and an option. We show that, an investor has higher cautiousness (i) if and only if she is always more likelyto buy the option; and (ii) if and only if she always demands more options per share. As an option’s payoff is a convex function, increasing positions in the option increases the convexity of a portfolio, which leads to an increase in skewness. Thus the results in this article establish the link between cautiousness and skewness preference.

AB - In this article we establish cautiousness as a new downside risk aversion measure, using a portfolio problem with a risk-free bond, a stock, and an option. We show that, an investor has higher cautiousness (i) if and only if she is always more likelyto buy the option; and (ii) if and only if she always demands more options per share. As an option’s payoff is a convex function, increasing positions in the option increases the convexity of a portfolio, which leads to an increase in skewness. Thus the results in this article establish the link between cautiousness and skewness preference.

U2 - 10.1093/rof/rft048

DO - 10.1093/rof/rft048

M3 - Journal article

VL - 18

SP - 2375

EP - 2395

JO - Review of Finance

JF - Review of Finance

SN - 1572-3097

IS - 6

ER -