Questions tagged [risk]
The risk tag has no usage guidance.
63
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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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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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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
34 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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18 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 ...
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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 ...
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11 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
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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
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1answer
41 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
62 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
76 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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31 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
85 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
62 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
252 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
111 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
30 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
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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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 ...
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1answer
91 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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548 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
141 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
245 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
249 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
71 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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214 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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510 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
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2answers
73 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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2answers
229 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
536 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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0answers
46 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
767 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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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
402 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
342 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
95 views
Why is there consumption sharing in Arrow-debreu time-zero complete markets trading model?
Specifically, I am looking at this paragraph
...
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2answers
435 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 ...
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2answers
229 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, ...
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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 ...
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474 views
What is the average economic value of a human life?
What is the economic value of a human life?
If there are multiple methods to use in calculating, what are they, which method is preferred, and why?
Considerations/sub-questions on methods
A. Is the ...
8
votes
2answers
235 views
Will high computing power substitute the certainty-equivalence assumption?
Bloom in a recent JEP paper considers that "the increase in computing power has made it possible to include uncertainty shocks directly in a wide range of models, allowing economists to abandon ...
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votes
1answer
72 views
Risky Assets over Bernoulli Utility
My question is about 6.C.4. of Mas-Colell et.al.'s Microeconomic Theory book.
We have N risky assets with returns $z_n, n = (1,...,N)$ per dollar invested which are distributed over $F(z_1,...,z_n).$ ...
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1answer
425 views
Independence axiom of lottery when $\alpha \ge 1$
When studying preference over lotteries we learned the independence axiom which goes like this:
The preference relation $\succsim$ on the space of simple lotteries $\mathscr{L}$ satisfies the ...
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0answers
27 views
How do governments deflect risk through greater volatility in the housing market?
Source: p 123 of 296, Understanding Housing Policy, by Brian Lund
Although
housing immobility limits the impact of globalisation, its influence on financial and labour markets
magnifies ...
3
votes
1answer
214 views
Perfect risk sharing in Arrow-Debreu w/ the same subjective beliefs over states
So I'm looking at a 2-agent Arrow-Debreu economy with one good. Consumption and endowments are zero in t=0, and 2 states are possible in t=1 with aggregate endowment in both states equal to 1.
We ...
3
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1answer
236 views
Relative risk aversion and lotteries exercise
Given a consumer with a utility function, $u(w)$, and a wealth of $w>1000$. Assuming that the consumers relative risk aversion is constant and equal to 1, that is $R_r(w)=1$ for $w>0$, the ...
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0answers
320 views
Probability of states of nature
I've been given the following question and would really appreciate any help on part a. I've looked over all of my resources for this course and we have always been given the probability of the ...
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2answers
1k views
What is the necessity of the FDIC in the US banking system?
A bank's basic function is to "borrow short and lend long". In other words, it borrows money from depositors over the short term, promising to repay it on demand, while it lends most of that money out ...
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1answer
36 views
How to evaluate if an activity is likely to produce a positive ROI?
I am trying to establish if it would be worth my while to sell a product in a particular online marketplace but am unsure how to evaluate if it would be financially worth my while.
The marketplace in ...
