# Questions tagged [risk]

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• 41
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### Reduction of compound lotteries seem to be incorrect?

Wikipedia reads: I feel that this axiom is much stronger than the usual "axiom of reduction of compound lottery" that we talk about because the Axiom 4' sufficiently imply EU (with weak ...
• 1,936
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### Single Crossing Property - Approach

I have the following problem, and want to learn how to proceed in a very precise and short manner to show the SSCP for $U(.)$ without the brute force approach. I wanted to ask for your help to find ...
• 41
31 views

### Degrees of Risk aversion and Expected utility [closed]

There are two agents with utility functions $g_1$ and $g_2$, where the agent with function $g_2$ has higher (absolute) risk-aversion. The agents face a lottery $((q,x_1),((1-q),x_2))$, i.e. agents ...
1 vote
23 views

### The liquidity of bank's assets and bank's systemic risk

I would have the following question. May the liquidity of a bank's assets be non-linearly related to the bank's systemic risk? More specifically, more liquidity can increase systemic risk during ...
1 vote
40 views

### What is the proper way to derive risk definitions from utility functions?

In typical mean-variance analysis, the risk-adjusted relative value of an individual asset takes the general form $\frac{\mu}{\sigma^2}$ with further weighting and normalization depending on the ...
• 11
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### Comparing agent decision-making under risk-neutrality and risk-Aversion

I am working on the following question but have not been able to come up with a suitable way to proceed. The setup is as follows: There is a technology (for example, a vaccine) which reduces the ...
1 vote
46 views

### Clarifying question about utility theory and preferences

I am trying to solve this question about preferences and I got into an argument about it. I just want to make sure I am not overlooking something really simple. What can you tell about the risk ...
11 views

### Effectiveness of liquidty regulation

I am writing to collect some thoughts regarding the best way to study the effectiveness of liquidity regulation (LCR and NSFR). To study the latter, I should avoid to collect actual banks' ratios, ...
1 vote
25 views

### Bond syndicates and systemic risk

I'm looking at both bond syndicates (groups of banks underwriting bond issuance), and also the holders of those bonds (groups of investors that hold those bonds for some time, potentially selling them ...
• 123
59 views

### Estimating willingness-to-pay for a risk-averse person who can 'select' lotteries

I'm studying how the willingness-to-pay differs for individuals who can 'select' lotteries. Individuals are presented with L1 first and can pay some amount to get lottery L2. Assume these are my ...
34 views

### Can FOSD-transitivity replace the transitivity in utility representation theorem?

Let $\succsim$ be a complete, non transitivity preference relation. I wonder if FOSD-transitivity implies transitivity. The primitive is the space of lotteries $p_1,p_2,p_3,...$. We say the preference ...
• 1,936
1 vote
80 views

### What is a very very famous example of structural estimation?

I took a behavioral econ class and learnt the "structural estimation" of risk-aversion parameter. Later some friends told me that what I learnt is too simple when I was bragging about my ...
• 329
115 views

### interest rate risk vs duration risk?

Is there a difference between interest rate risk vs duration risk? I feel as though I have heard them used interchangeably but I don't know if there is any distinguishing factor between the two.
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### Willingness to sell a lottery ticket vs. willingness to buy a lottery ticket

I'm struggling with this question: There is a lottery which gives you D with p = 0.25 and L with p = 0.75 while initial wealth is w (w > D > L > 0). What is the minimum price the person would ...
• 41
1 vote
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### Stocks and call option

I've been asked this question by my professor, but I'm not sure about the answer: "A broker proposes you two type of investment: the first is buying 100 shares of the company X at the current ...
• 11
176 views

### example of risk neutral or risk loving utility function

i"m looking for an example of either risk loving or risk neutral utility function. what i mean is like for risk averse, we have the HARA utility function. is there a utility function that exhibit ...
51 views

### Covered interest rate parity: the forward contract is not risk free

Covered interest rate parity (CIRP or CIP) can be formulated as: $$(1+r_{f,Home})=\frac{S_0}{F_{0\rightarrow 1}} (1+r_{f,Foreign})$$ where $r_f$ are risk-free rates in the home and foreign countries,...
• 2,385
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### What was the original paper that showed that estimates of risk aversion from micro and macro are inconsistent?

One of the well known paradoxes in macroeconomics is that estimates of risk aversion from experimental micro data do not match the ones estimated from macro data. I know there was an important paper ...
• 2,772
107 views

### Who insures the FDIC in case it fails?

I understand that the Federal Deposit Insurance Corporation (FDIC) failing is unlikely, but the probability of such a failure is still positive. In case the FDIC fails, who covers the customers' ...
• 329
1 vote
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### What is the difference between consumption smoothing and risk smoothing?

So there is a body of literature that talks about consumption smoothing (e.g. Rosenzweig & Stark 1989) and another body of literature that talks about risk smoothing in the context of insurance. ...
• 83
1 vote
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### Risk Premium for Prospect Theory-like value function

I am curious how to calculate the following risk premium for a utility function that is not linear in $w$. What i'm asking is the following: Consider an agent with utility function $u$, initial wealth ...
• 303
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### Is Epstein-Zin utility a generalization of dynamic expected utility (DEU)?

Epstein-Zin (EZ) utility is the solution to: DEU is relatively simple: $\sum_t \delta ^t\mathbb E[u(c_t)]$. Is DEU a special case of EZ? How are those two models compared? Since EZ is a solution of a ...
• 1,936
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### Consumption CAPM and compounded risk free rate [closed]

I am studying consumption CAPM and trying to prove, assuming lognormal consumption growth one can show that the continuously compounded risk-free rate is:
106 views

### Most utility functions under risk and uncertainty generalizes expected utility. What is deadly wrong if a model does not include EU as special case?

Why do people generalize EU instead of making an entirely new model, or create a model that is neither a special case nor an extension of EU? To my knowledge, most utility functions under risk and ...
• 1,936
1 vote
6 views

### Finding the risk attitude parameter in a CPT Risk Elicitation Model

I'm working with this article by Bauermeister et al. that compares the risk attitude parameters found using two different risk elicitation models. The models each use a series of gambling options to ...
• 309
1 vote
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### Why does Central Bank Digital Currency affect commercial banks' retail deposits?

Lannquist,2020, p.6 said that Retail CBDC Can challenge commercial banks’ market power over retail deposits, pressuring banks to increase interest rates and offer better financial services to ...
• 1,166
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• 105
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### Second order stochastic dominance

I have two very basic questions about second order stochastic dominance (SOSD): Am I right in thinking that this is only a partial order, i.e. you can find a pair of lotteries such that neither SOSD ...
• 886
1 vote
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### Does the Fed/SEC have tools to address shock-propagation from correlation of fund flows?

Premise In 2017, passively invested assets totaled 37% of mutual funds and ETFs; by 2021 this number is closer to 50% if not more. After the market downturn in (March) 2020, the Fed updated their ...
• 1,099
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### How to interpret risk premium

I do not understand the notion risk premium. Let us suppose that John goes to the city by car, but he is thinking about not paying for the parking. If he is caught in the act he must pay the fine. How ...
• 131
64 views

### Can we model risk with only probability?

Sorry for the confusion! I am adding an example to see if it helps: For example, consider a gamble A, with payoffs {a,b,c,d}, whose probability of each payoff being realized is equal (so 25% each); ...
96 views

### In Barro's (2009) Rare Disaster Model in AER: How to derive equation (5)

In Barro (2009) http://piketty.pse.ens.fr/files/Barro2009.pdf My question is reference to equation #5, whereby Barro is deriving the reciprocal of the market value 1/v, and I am trying to derive this ...
• 31
1 vote
89 views

### Risk with unknown probability distribution of the outcomes

From Wikipedia: "Risk aversion comes from a situation where a probability can be assigned to each possible outcome of a situation and it is defined by the preference between a risky alternative ...
• 113
660 views

### Negative Risk Free Rate Sharpe Ratio

currently I am writing my Master-Thesis about SRI-Fonds. For analysing Sharpe Ratios from different Fonds I need to use the risk free rate (e.g. Euribor 3M). Unfortunately I can‘t find anything about ...
1 vote
78 views

### Cashflow Risk vs Discount Risk

I'm studying financial economics/asset pricing and I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (...
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1 vote
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### 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 ...
1 vote
44 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 ...
• 105
1 vote
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### 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. ...
29 views