Title

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

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.

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Full-text Version

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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