Do Investors Need Kink to Cope with Ambiguity?

Takashi Nishiwaki

doi:10.1016/j.iref.2020.08.001

Do Investors Need Kink to Cope with Ambiguity?

Takashi Nishiwaki

Research output: Contribution to journal › Article › peer-review

Abstract

This study proposes a possible explanation for demand for derivatives that have kinks, such as plain vanilla options, using a market equilibrium model. In our setting, there is one risky asset and one ambiguous additive background risk, and a complete market exists for the risky asset. Under this environment, the optimal payoff function for an ambiguity-averse investor who has an exponential utility function exhibits kinks.

Original language	English
Pages (from-to)	391-397
Number of pages	7
Journal	International Review of Economics and Finance
Volume	70
DOIs	https://doi.org/10.1016/j.iref.2020.08.001
Publication status	Published - 2020 Nov
Externally published	Yes

Keywords

Ambiguity
Background risk
Kink
Multiple prior model

ASJC Scopus subject areas

Finance
Economics and Econometrics

Access to Document

10.1016/j.iref.2020.08.001

Cite this

@article{315917f6a1c941b1aa67d0ebcb216a09,

title = "Do Investors Need Kink to Cope with Ambiguity?",

abstract = "This study proposes a possible explanation for demand for derivatives that have kinks, such as plain vanilla options, using a market equilibrium model. In our setting, there is one risky asset and one ambiguous additive background risk, and a complete market exists for the risky asset. Under this environment, the optimal payoff function for an ambiguity-averse investor who has an exponential utility function exhibits kinks.",

keywords = "Ambiguity, Background risk, Kink, Multiple prior model",

author = "Takashi Nishiwaki",

note = "Publisher Copyright: {\textcopyright} 2020 Elsevier Inc.",

year = "2020",

month = nov,

doi = "10.1016/j.iref.2020.08.001",

language = "English",

volume = "70",

pages = "391--397",

journal = "International Review of Economics and Finance",