Jump to ContentJump to Main Navigation
Asset Pricing in Discrete TimeA Complete Markets Approach$
Users without a subscription are not able to see the full content.

Ser-Huang Poon and Richard Stapleton

Print publication date: 2005

Print ISBN-13: 9780199271443

Published to Oxford Scholarship Online: July 2005

DOI: 10.1093/0199271445.001.0001

Show Summary Details
Page of

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2019. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see www.oxfordscholarship.com/page/privacy-policy).date: 26 May 2019

Risk Aversion, Background Risk, and the Pricing Kernel

Risk Aversion, Background Risk, and the Pricing Kernel

(p.19) 2 Risk Aversion, Background Risk, and the Pricing Kernel
Asset Pricing in Discrete Time

Ser-Huang Poon (Contributor Webpage)

Richard Stapleton (Contributor Webpage)

Oxford University Press

‘Risk Aversion, background Risk, and the Pricing Kernel’ looks in more detail at utility functions and their effect on the shape of the pricing kernel. The authors discuss the meaning of risk aversion and, in particular, ‘relative risk aversion’ and show that if relative risk aversion is constant at different levels of wealth, then the pricing kernel exhibits constant elasticity. They then show that the introduction of ‘background risk’, that is, non-hedgeable risks, causes the pricing kernel to exhibit declining elasticity. This effect on the pricing kernel is particularly significant for the pricing of options.

Keywords:   background risk, constant elasticity, declining elasticity, relative risk aversion, utility

Oxford Scholarship Online requires a subscription or purchase to access the full text of books within the service. Public users can however freely search the site and view the abstracts and keywords for each book and chapter.

Please, subscribe or login to access full text content.

If you think you should have access to this title, please contact your librarian.

To troubleshoot, please check our FAQs , and if you can't find the answer there, please contact us .