Questions tagged [risk]
The risk tag has no usage guidance.
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questions
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Risk aversion problem where the first derivative of utility function is negative [closed]
In this problem, the utility function's first derivative is negative and 2nd derivative is positive. I don't know how to answer. Please help!
I know the answer of (b). I need help with (a) only.
5
votes
1answer
37 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 ...
0
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0answers
22 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. ...
0
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1answer
21 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 ...
2
votes
1answer
164 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.
1
vote
1answer
34 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 ...
1
vote
1answer
45 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 ...
0
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0answers
14 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 ...
0
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1answer
13 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).
1
vote
1answer
27 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 ...
0
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0answers
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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vote
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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10 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 ...
0
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1answer
50 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 ...
0
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0answers
19 views
Why might firms be averse to idiosyncratic risk?
Under the CAPM and other theories, a widely held corporation should be averse only to systematic risk, correlated with other investments in the economy, not idiosyncratic risk like a CEO dying or a ...
0
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0answers
10 views
How to interpret the (expected) exposure and CVA of an option or a single share
I have a quick (hopefully simple) question regarding the interpretation of the expected exposure of a call option and a single share. I've done some computations on the formula for the expected ...
0
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0answers
33 views
How to calculate indentical cash flows?
So i have this question:
Homemade leverage Companies A and B differ only in their capital structure. A is financed 30% debt and 70% equity; B is financed 10% debt and 90% equity. The debt of both ...
2
votes
1answer
109 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 ...
1
vote
1answer
44 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 ...
4
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1answer
83 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 ...
4
votes
3answers
81 views
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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0answers
32 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 ...
2
votes
3answers
89 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 ...
2
votes
1answer
67 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) ...
5
votes
5answers
261 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 ...
3
votes
2answers
115 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, ...
0
votes
1answer
32 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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vote
1answer
54 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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vote
0answers
13 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 ...
2
votes
1answer
99 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 ...
8
votes
5answers
609 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" ...
0
votes
1answer
147 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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vote
2answers
258 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 ...
2
votes
1answer
279 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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vote
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
236 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 ...
2
votes
0answers
538 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-...
3
votes
2answers
75 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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votes
2answers
231 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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votes
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, ...
0
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2answers
575 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
...
3
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0answers
47 views
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
840 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 ...
3
votes
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 ...
4
votes
1answer
425 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 ...
2
votes
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 ...
3
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1answer
101 views
Why is there consumption sharing in Arrow-debreu time-zero complete markets trading model?
Specifically, I am looking at this paragraph
...
2
votes
2answers
451 views
What is the need for a special purpose entity/vehicle in mortgage backed securities
What is the need to create a special purpose entity/vehicle (SPV) for mortgage backed securities? What potential risks are avoided due to the creation of SPV?
It is my naive idea that the holder of ...
3
votes
2answers
250 views
Sanity of lending out made-up money
Background
I've done some research to get an understanding into the issue I want to ask about. Regrettably, I found out general descriptions of the mechanism and/or evidently biased explanations, ...
2
votes
1answer
72 views
How is project value enhanced by uncertainty in market payoff?
I was reading about the concept of real options valuation. It says that ROV has shown that uncertainty in market pay-off enhances the project value (V). How is that? Will it be possible to explain ...
