We consider the demand for state contingent claims in the presence of a zero-mean, nonhedgeable background risk. An agent is defined to be generalized risk averse if he/she reacts to an increase in background risk by choosing a demand function for contingent claims with a smaller slope. We show...

In this paper, we examine an exchange economy with a financial market composed of three assets: a share of a stock, an European call option written on the stock, and a riskless bond. The financial market is assumed to be incomplete and the option is not a redundant asset. In such a case the...

This paper deals with the effects of tax rate uncertaity on risk-neutral and risk-averse investment behavior. We analyse effects of stochastic tax rates on both real and financial investment. It emerges that under risk neutrality as well as under risk aversion, increased tax rate uncertainty has...