Effects of background risks on cautiousness with an application to a portfolio choice problem

We provide necessary and sufficient conditions on an individual's expected utility function under which any zero-mean idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), which is the key determinant for this individual's demand for options and portfolio insurance.

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Year of publication:	2011
Authors:	Hara, Chiaki ; Huang, James ; Kuzmics, Christoph
Published in:	Journal of Economic Theory. - Elsevier, ISSN 0022-0531. - Vol. 146.2011, 1, p. 346-358
Publisher:	Elsevier
Keywords:	Risk aversion Risk tolerance Cautiousness Portfolio insurance Idiosyncratic risks Background risks Incomplete markets

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Type of publication:	Article
Source:	RePEc - Research Papers in Economics

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