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 -