We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in...

We generalize the concept of a risk-neutral valuation relationship in order to price options in cases where the restrictive conditions required for a traditional one-dimensional risk-neutral valuation relationship do not apply. We derive conditions under which a two-dimensional risk-neutral...

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...

We define a class of risk-taking-neutral (RTN) background risks. These background risks have the property that they will not alter decisions made with respect to another risk, for individuals with HARA utility. If we wish to compare a decision made with and without some exogenous background...

The Black-Scholes model is based on a one-parameter pricing kernel with constant elasticity. Theoretical and empirical results suggest declining elasticity and, hence, a pricing kernel with at least two parameters. We price European-style options on assets whose probability distributions have...

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...

The Black-Scholes model is based on a one-parameter pricing kernel with constant elasticity. Theoretical and empirical results suggest declining elasticity and, hence, a pricing kernel with at least two parameters. We price European-style options on assets whose probability distributions have...