The demand for a risky asset in the presence of a background risk
Document Type
Journal article
Source Publication
Journal of Economic Theory
Publication Date
1-1-2011
Volume
146
Issue
1
First Page
372
Last Page
391
Publisher
Academic Press
Keywords
Risky asset, Background risk, Expectation dependence
Abstract
We examine the demand for a risky asset in the presence of two risks: a financial risk and a background risk which need not be financial. First, we compute the necessary and sufficient condition for a positive demand for a risky asset, showing that it depends on two terms capturing respectively the direct effect of risk premium and the dependence between the two risks. Second, we develop higher order expectation dependence concept and show that the more information about the sign of higher cross derivatives of the utility function we have, the weaker dependence conditions on distribution we achieve.
DOI
10.1016/j.jet.2010.10.011
Print ISSN
00220531
E-ISSN
10957235
Publisher Statement
Copyright © 2010 Elsevier Inc.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Li, J. (2011). The demand for a risky asset in the presence of a background risk. Journal of Economic Theory, 146(1), 372-391. doi: 10.1016/j.jet.2010.10.011