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Cautiousness, skewness preference, and demand for options

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Cautiousness, skewness preference, and demand for options. / Huang, James; Stapleton, Richard.
In: Review of Finance, Vol. 18, No. 6, 10.2014, p. 2375-2395.

Research output: Contribution to Journal/MagazineJournal articlepeer-review

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Huang J, Stapleton R. Cautiousness, skewness preference, and demand for options. Review of Finance. 2014 Oct;18(6):2375-2395. Epub 2013 Nov 14. doi: 10.1093/rof/rft048

Author

Huang, James ; Stapleton, Richard. / Cautiousness, skewness preference, and demand for options. In: Review of Finance. 2014 ; Vol. 18, No. 6. pp. 2375-2395.

Bibtex

@article{4fc45aad88b14bea9cef8c9b68fb8ff3,
title = "Cautiousness, skewness preference, and demand for options",
abstract = "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{\textquoteright}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.",
author = "James Huang and Richard Stapleton",
year = "2014",
month = oct,
doi = "10.1093/rof/rft048",
language = "English",
volume = "18",
pages = "2375--2395",
journal = "Review of Finance",
issn = "1572-3097",
publisher = "Oxford University Press",
number = "6",

}

RIS

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 -