Risk Taking with Additive and Multiplicative Background Risks

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2011
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Journal of Economic Theory ; 146 (2011), 4. - pp. 1547-1568. - ISSN 0022-0531
Abstract
We examine the effects of background risks on optimal portfolio choice. Examples of background risks include uncertain labor income, uncertainty about the terminal value of fixed assets such as housing and uncertainty about future tax liabilities. While some of these risks are additive and have been amply studied, others are multiplicative in nature and have received far less attention. The simultaneous effect of both additive and multiplicative risks has hitherto not received attention and can explain some paradoxical choice behavior. We rationalize such behavior and show how background risks might lead to seemingly U-shaped relative risk aversion for a representative investor.
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330 Economics
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Derived risk aversion,Additive,multiplicative background risk
Conference
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Cite This
ISO 690FRANKE, Günter, Harris SCHLESINGER, Richard C. STAPLETON, 2011. Risk Taking with Additive and Multiplicative Background Risks. In: Journal of Economic Theory. 146(4), pp. 1547-1568. ISSN 0022-0531. Available under: doi: 10.1016/j.jet.2011.03.008
BibTex
@article{Franke2011Takin-14799,
  year={2011},
  doi={10.1016/j.jet.2011.03.008},
  title={Risk Taking with Additive and Multiplicative Background Risks},
  number={4},
  volume={146},
  issn={0022-0531},
  journal={Journal of Economic Theory},
  pages={1547--1568},
  author={Franke, Günter and Schlesinger, Harris and Stapleton, Richard C.}
}
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