Questions tagged [risk]
The risk tag has no usage guidance.
67
questions
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1answer
43 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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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
10 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
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1answer
22 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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0answers
13 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 ...
1
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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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0answers
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
43 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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0answers
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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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 ...
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18 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 ...
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1answer
42 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
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3answers
77 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
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 ...
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
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1answer
65 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
257 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
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2answers
113 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
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1answer
31 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 ...
1
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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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
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1answer
97 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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votes
5answers
581 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
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1answer
144 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
252 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
268 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 ...
1
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
226 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
527 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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2answers
230 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, ...
0
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2answers
567 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
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
810 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
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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 ...
4
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1answer
411 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 ...
3
votes
1answer
98 views
Why is there consumption sharing in Arrow-debreu time-zero complete markets trading model?
Specifically, I am looking at this paragraph
...
2
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2answers
441 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
230 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
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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 ...
7
votes
3answers
514 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
250 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 ...
2
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1answer
73 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 $F(z_1,...,z_n).$ ...
5
votes
1answer
438 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 ...
asked Jun 16 '15 at 20:40
Greek - Area 51 Proposal
1,0592 gold badges9 silver badges28 bronze badges
3
votes
1answer
216 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 ...
