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 |
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Pages (from-to) | 391-397 |
Number of pages | 7 |
Journal | International Review of Economics and Finance |
Volume | 70 |
DOIs | |
Publication status | Published - 2020 Nov |
Externally published | Yes |
Keywords
- Ambiguity
- Background risk
- Kink
- Multiple prior model
ASJC Scopus subject areas
- Finance
- Economics and Econometrics