Questions tagged [risk]

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2answers
32 views

How is an interest swap collateralized

I am trying to understand what it means for an interest swap to be collateralized. If for example, I am paying fixed to a bank and receive floating in return. Who is giving collateral to whom? and how ...
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30 views

Term for risk AND ambiguity

This question is related to References for particular definitions of risk and uncertainty, which offers an excellent description of risk and uncertainty. Just as a recap: Knight (1921) described risk ...
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1answer
22 views

What are the differences between hedging with swaps, options or futures?

For instance if a bank wants to hedge against interest rate risk, it could use interest rate swaps, or options or futures contract. Or in any other example, when a manager is hedging against risks. ...
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22 views

What would we say on the utility of risk and its consequences?

Anything has its risks and anything has its utility or desutility. The risk aversion causes a looking for safer alternatives in the market which maximizes utility in a trading off between risk and ...
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1answer
24 views

CDO and Nonpositive Equity Questions

I have two questions about statements made in this video: https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bank-bailout/v/bailout-2-book-value At 6:25, the video ...
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1answer
32 views

Job Search and the Investment Problem [closed]

I don't know what to take as the cost of accepting the job. Kindly guide me through deciding how to frame the equation.
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22 views

Solution to the Aiyagari model: why a sparse capital grid?

When solving a model à la Aiyagari, why is it needed to have more points close to zero? I would be grateful if you could point me out some reference on how to implement the sparse grid. In ...
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1answer
42 views

Could anyone here be able to explain gambling addiction and its debt with Microeconomics theory?

I am a research master student in Cognitive and Clinical Neuroscience, with the specialization/track Neuroeconomics and have to come up with a master thesis subject soon. I was thinking about gambling ...
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43 views

Certainty equivalent and risk premium

I'd like some guidance on the below practice question on uncertainty in consumer theory. I think I am confused on the certainty equivalent & risk premium or I'm not understanding the question. ...
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1answer
24 views

Is there some definition about risk sharing?

I was searching for a definition of risk sharing and I have found the following: $\underline{Definition:}$ Risk Sharing — also known as "risk distribution," risk sharing means that the premiums and ...
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1answer
216 views

Why is the risk premium always positive for risk averse individuals?

I think this has to do with the definition of concavity and the fact that a risk averse person has a concave utility function, but I'm not sure how that helps.
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1answer
55 views

How to calculate CRRA bounds from Holt and Laury (2002) type lottery?

Lottery is between: Option A: a certain choice of £5 Option B: £10 with probability 0.1 and £1 with probability 0.9 The probability of receiving £10 increases in each subsequent choice. How do I ...
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1answer
48 views

Why charge higher interest rates to poorer customers?

Consumer loans/credit charge different rates depending on the individual's risk. In particular, it charges more to poorer individuals. Whilst this seems to make sense from a risk perspective, there ...
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15 views

Estimate Markov process for incomplete market model

Let's say I have an economy in which the agent's budget constraint is: $c_t + k_{t+1} = (1+r-\delta)k_t+w_t\varepsilon_t$ Where $\varepsilon$ follows a Markov process with 2 states. I now want to ...
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1answer
16 views

Does Medicaid or Medicare represent a higher risk to the Federal Government Solvency and Debt going forward?

I'm trying to understand not only which program is expected to be larger in terms of costs, but which one has the least capacity to adjust (reduce benefits if revenues for the program fall).
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1answer
31 views

How is the utility function with constant relative risk-aversion obtained?

In this slide, it says that constant relative risk-Aversion utility function have this form. $u(x) = \frac{1}{1-b} x^{1-b}$ for $b≠1$ $u(x) = In(x)$ for $b=1$ When I tried to derive the utility ...
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14 views

Corporate finance - capm beta estimation

I want to solve the following problem as an exercise to test my understanding of the capm material: Assume that CAPM is valid. The market portfolio consists of 3 stocks such that $i = A, B, C$ with ...
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0answers
58 views

Assessing risk in a decision problem with repeated toss

The problem starts at time t0. At each time step, the participant can choose to opt out and claim a loser's reward Rl. At each time step, the participant has a probability p to win a winner's reward ...
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11 views

Risks Quantification (soft question)

Can anyone please recommend literature (books, papers, whatever) on the topic of risk quantification? By risk quantification I mean financial assessment of e.g. credit or market risk. Free sources ...
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1answer
101 views

Proof: Risk averse; Certainty Equivalent smaller than expected value

I would like to show for a randomly distributed variable $x$ with CDF $F(\cdot)$ , given a Bernoulli utility function $u(x)$ the following property holds: The certainty equivalent, $CE(\cdot)$, is ...
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1answer
115 views

Why do riskier investments pay more?

I'm talking about bonds, stocks, and the sort. I understand that an individual investor that's planning to invest, say, 50% of his savings, may require a higher expected gain to go for a riskier ...
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1answer
45 views

Why does it seem like the average cost threshold protocol has a possible gain but no chance of loss?

So, the average cost threshold protocol is a theoretical protocol for crowd funding club goods (it can also be used to crowd fund public goods, but I'll only focus on club goods in this post). It is ...
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1answer
98 views

Transformation of random variables and second order stochastic dominance

Suppose $X$ and $Y$ are two random variables where $X$ has SOSD (second order stochastic dominance) over $Y$. Let $g(\cdot)$ be a monotonic function and $X' = g(X)$ and $Y' = g(Y)$. Under what ...
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3answers
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Can I recreate an experiment on Allais paradox using student grades as payoffs?

For a project in experimental economics, I thought of doing something related to expected utility theory/prospect theory, but using grades instead of money. Is this reformulation of the Allais ...
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38 views

Can aggregate risk to the economy be insured, and how?

There has been a lot of discussion for a while now over how the short market on Tesla is quite crowded. This got me thinking of what possible benefits the short market bestows upon the economy as a ...
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3answers
92 views

Mean vs. variance - which is dominant?

I am currently trying to gain some basic understanding of the mean-variance tradeoff. However, since I do not have an economic education background, I am struggling with some issues. Currently I am ...
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1answer
71 views

Construct utility function for a risk-averse agent

I am trying to construct utility function for an agent who can be risk-seeking or risk-averse. We have an agent $i$ who has an ideal point $x$ in a policy space $X = [0,1]$. There is a policy (option) ...
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5answers
286 views

Why is everyone suggested to specialize their education?

Why is so common to suggest university students to specialize in order to get a better paid job? This goes completely against the principle of diversification of investments, in order to decrease ...
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2answers
116 views

When does gambling reduce risk?

Suppose that you face risk. It is obvious that taking gambles whose outcomes are negatively correlated with the outcomes of your other gambles can reduce your overall risk ('hedging'). My question, ...
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1answer
40 views

Value of Statistical Life and Risk

I have been reading a paper by Bove & Elia (2011), where they quote a definition of the value of statistical life from Bellavance, Dionne & Lebeau (2009). I have tried making my peace with the ...
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1answer
55 views

How to estimate market risk using only publicly available data?

How can I calculate market risk for the US Stock Market (NYSE or NASDAQ) using only freely accessible data? I'm only interested in the market risk of the whole economy not of different industries, ...
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14 views

What were the liquidity requirements prior to Basel III?

I am investigating the impact of enforcing the Basel III liquidity requirements with a focus on the LCR. I have found some information about regulations in fore prior to Basel III in Sweden and ...
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1answer
105 views

Why does Mascolell define second-order stochastic dominance as such?

Is not Mascolell's definition in his microeconomic theory of the second-order stochastic dominance narrower? He defines for distribution functions with the same mean only. Although he gives some ...
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5answers
716 views

References for particular definitions of risk and uncertainty

I have some doubts about risk vs. uncertainty. I have read the thread "What is the difference between risk, uncertainty and ambiguity" and have skimmed through Knight's "Risk, Uncertainty, and Profit" ...
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1answer
156 views

Swaps and systemic risk

I understand the systemic risk that can be associated with the trading of credit default swaps, but is it the same with interest rate swaps? What was the "default rate" on interest rate swaps during ...
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2answers
264 views

Are risk-costs a form of external costs?

An example to make to question more clear: With the use of nuclear power plants come several risk-costs (the risk of a nuclear disaster). These costs aren't included in the energy price and there is ...
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1answer
301 views

Inc Linear Transformation of Bernoulli Utility

According to MWG Proposition 6.B.2, it illustrates that the expected utility form is preserved only by increasing linear transformation. What is the significance of this proposition? The part I ...
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1answer
74 views

Consequentialist View of Risk

In MWG, the authors introduce the consequentialist view of risk by assuming for any risky alternative, only the reduced lottery over final outcome matters to decision maker. From philosophical view, ...
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0answers
277 views

How a utility function which is both DARA and CRRA can be explained?

I'm studying risk aversion and I cannot make a intuitive explain about the utility function which is DARA and CRRA. for instance, let's say, $\ln W$, where $W$ stands for one's wealth. by the ...
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0answers
577 views

Certainty Equivalents and Risk Premiums in Expected Utility Theory for Asymmetric Distributions

I want to calculte risk-premiums in order to assess how much risk-averse customers would be willing to pay for an insurance against an uncertain loss modeled by a random variable $X$. How would a risk-...
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2answers
77 views

VaR and rating for commercial banks

I would like to know if there exist a database where Value at risk of commercial banks are. Beyond that if there is a connection between the rating from agency (as S&P, Fitch etc..) and the VaR ...
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257 views

Do stock markets price in existential risk (i.e. global nuclear war)?

Question Moved from Money StackExchange: https://money.stackexchange.com/questions/74002/do-stock-markets-price-in-existential-risk-i-e-global-nuclear-war Q: Do stock markets price in existential ...
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1answer
20 views

Is there a good mechanism to incentivize leveraged firms to take less risks?

It seems that there are some circumstances, say when the government foresees a financial crisis, where it would like firms to hedge, take less riesk etc. However, leveraged agents benefit from risk, ...
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2answers
611 views

How to have same utility function for two persons?

I have a question regarding utility functions: Utility can be defined as follows: $U=1+e^{\frac{x}{RT}}$ U:Utility x: What we want to find the utility for (Certain equivalent) RT: Risk tolerance ...
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Why don't firms and individuals do much more risk management? Couldn't they all hedge all kinds of risks financially?

There are many risks in the economy that agents could hedge. For example, house prices can go up or down, healthcare costs canchange, gas prices constantly change in fact, food prices,etc. They all ...
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2answers
941 views

Negative expected value; risk neutral choice

Suppose there are two options: (1) take a gamble with 50% chance you win \$100 and 50% chance you lose \$110 or (2) don't take the gamble at all and win/lose nothing. Would the risk-neutral take the ...
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2answers
2k views

Is DARA utility implying CRRA most of the time?

The Wikipedia page on risk aversion states that a "Constant Relative Risk Aversion implies a Decreasing Absolute Risk Aversion, but the reverse is not always true". Let me decompose this statement in ...
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1answer
470 views

Does dollar cost averaging actually have any advantage over one time investment?

Some banks promote savings plans by stating that investing a fixed amount of money in regular time intervals minimizes the average buying price or the downside risk (dollar cost averaging). Since the ...
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2answers
344 views

Is the loan principal ever delivered in pieces over time?

Not sure if this is the right place for this question but it's more of a theoretical finance question than a personal finance question. So a loan has a principal amount that is given to the borrower ...
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1answer
105 views

Why is there consumption sharing in Arrow-debreu time-zero complete markets trading model?

Specifically, I am looking at this paragraph ...