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We examine asset prices in a representative-agent model of general equilibrium. Assuming only that individuals are risk averse, we determine conditions on the changes in asset risk that are both necessary and sufficient for the asset price to fall. We show that these conditions neither imply,...
Persistent link: https://www.econbiz.de/10012786224
Credit risk is pervasive throughout financial markets. Traditionally, various financial institutions have assumed the burden of credit risk. Banks have supported the credit risk attached to bank loans and forward contracts. Credit insurance companies have provided coverage for the commercial...
Persistent link: https://www.econbiz.de/10012742313
We examine the effects of non-portfolio risks on optimal portfolio choice. Examples of non-portfolio risks include, among others, uncertain labor income, uncertainty about the terminal value of fixed assets such as housing and uncertainty about future tax liabilities. In particular, while some...
Persistent link: https://www.econbiz.de/10012730610
We consider a competitive insurance market with adverse selection. Unlike the standard models, we assume that individuals receive the benefit of some type of potential government assistance that guarantees them a minimum level of wealth. For example, this assistance might be some type of...
Persistent link: https://www.econbiz.de/10012785157
High correlations between risks can increase required insurer capital and/or reduce the availability of insurance. For such insurance lines, securitization is rapidly emerging as an alternative form of risk transfer. The ultimate success of securitization in replacing or complementing...
Persistent link: https://www.econbiz.de/10012786201
Higher-order risk effects play an important role in examining economic behavior under uncertainty. A precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one's behavior...
Persistent link: https://www.econbiz.de/10012768261
Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable Xi dominates Yi via ith-order stochastic dominance for i = M,N. We show that the 50-50 lottery [XN + YM, YN + XM] dominates the lottery [XN + XM, YN + YM] via (N +...
Persistent link: https://www.econbiz.de/10012768347
This article focuses on two cornerstone results in insurance economics: Mossin's Theorem on the optimality of full versus partial coverage, and Arrow's Theorem on the optimality of straight deductible policies. Both of these results are examined in a model assuming only risk aversion, and not...
Persistent link: https://www.econbiz.de/10012792126
This article shows how the introduction of severity risk into a simple model of insurance markets affects the optimal level of insurance. Also examined is how severity risk affects the equilibrium for an insurance market exhibiting adverse selection in the frequency risk. Individuals are assumed...
Persistent link: https://www.econbiz.de/10012757462
Persistent link: https://www.econbiz.de/10006795179