The choice of an agent between risky and riskless assets is complicated by the existence of idiosyncratic risk. In this paper the agent chooses state-dependent shares of aggregate marketable income (a sharing rule) to provide a partial hedge against the idiosyncratic risk. The agent's Utility...

In this paper, we derive an equilibrium in which some investors buy call/put options on the market portfolio while others sell them. Also, some investors supply and others demand forward contracts. Since investors are assumed to have similar risk-averse preferences, the demand for these...

We present a necessary and sufficient condition on an agent's utility function for a simple mean preserving spread in an independent background risk to increase the agent's risk aversion (incremental risk vulnerability). Gollier and Pratt (1996) have shown that declining and convex risk aversion...

We consider the demand for state contingent claims in the presence of a zero-mean, nonhedgeable background risk. An agent is defined to be generalized risk averse if he/she reacts to an increase in background risk by choosing a demand function for contingent claims with a smaller slope. We show...

An important determinant of option prices is the elasticity of the pricing kernel used to price all claims in the economy. In this paper, we first show that for a given forward price of the underlying asset, option prices are higher when the elasticity of the pricing kernel is declining than...

In this paper, we derive an equilibrium in which some investors buy call/put options on the market portfolio while others sell them. Since investors are assumed to have similar risk-averse preferences, the demand for these contracts is not explained by differences in the shape of utility...

We derive general properties of two-factor models of the term structure of interest rates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. In this model, the...

We build a no-arbitrage model of the term structure of interest rates using two stochastic factors, the short-term interest rate and the premium of the futures rate over the short-term interest rate. The model provides an extension of the lognormal interest rate model of Black and Karasinski...

We derive general properties of two-factor models of the term structure of interest rates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure...

We derive general properties of two-factor models of the term structure of interestrates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. In this model, the...