Questions tagged [risk]

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Are passive asset management strategies increasing the volatility of big cap stocks?

Over the last decade, more money has been allocated using passive asset management strategies. A good part of the latter relies on ETFs that are replicating indices that are mainly comprised of big-...
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46 views

Proof that $U(\sum_{n=1}^{N}{p_nL_n})=\sum_{n}^{N}{p_nU(L_n)}$

I understand the expected value of a lottery is $\sum_n^N{p_nL_n}$ where there are $N$ possible outcomes, each with a probability $p_n$ with $n=1,...,N$ and $\sum_{n}p_n=1$ (that's rather trivial I ...
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96 views

Bertrand game with delivery risk and side payments

Consider three agents $A_i$, who engage in a Bertrand game. All agents have perfect knowledge on all parameters and the distribution $F()$. $A_1$ moves first and selects price $0\leq p_1\in \mathbb{R}...
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242 views

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 ...
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1answer
31 views

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 ...
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39 views

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 ...
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58 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); ...
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1answer
53 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 ...
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1answer
49 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 ...
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1answer
205 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 ...
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68 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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2answers
37 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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33 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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2answers
71 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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26 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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32 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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54 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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41 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
328 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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166 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
53 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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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
51 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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60 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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1answer
186 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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121 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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52 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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114 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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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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48 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
99 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
77 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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349 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
126 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
57 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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59 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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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
120 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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877 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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177 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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267 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
348 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
75 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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363 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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627 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
78 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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305 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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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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756 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 ...