This note investigates the impact on option prices of divergent consumer confidence. To model this, we assume that consumers disagree on the expected growth rate of aggregate consumption. With other conditions unchanged in the discrete-time Black-Scholes option-pricing model, we show that the...

The three concepts, risk aversion, prudence, and cautiousness have interpretations for investor's main activities in financial markets, namely investment, saving, and hedging respectively. This paper investigates the relationships between these three concepts. It reveals that a more absolutely...

In this paper we raise a question on the theoretical foundation of option implied risk neutral density. We prove that given any number of options, there exist numerous risk neutral densities which are piecewise constant, have only two values, either an lower bound or an upper bound on the true...

Analogous to first stochastic dominance option bounds, second stochastic dominance option bounds give the range of possible option values baring second order arbitrage opportunities. Using linear programming, Constantinides et al. (Review of Financial Studies, 2008) show that violations of these...

In this paper we apply the recently developed concept of almost first stochastic dominance to derive option bounds given the prices of any number of concurrently expiring options. Almost first stochastic dominance is adjusted first stochastic dominance which bars extreme utility functions that...

When is it appropriate to add a convex component such as stock options to an optimal, managerial compensation contract? We show that, contrary to what is said in the literature, it is not risk aversion but cautiousness, a downside risk aversion measure, which gives the answer. When stockholders...

Huang and Stapleton (2012) characterize cautiousness as a measure of skewness preferences using a simple portfolio problem with a risk-free bond, a stock, and an option on the stock. In this paper, we explain the link between cautiousness and skewness preferences in a more general context where...

In this note we generalize the Negishi approach to equilibrium. We embed a standard one-period exchange economy into a two-period model, where agents' first-period utility functions can be any strictly increasing and concave functions satisfying the lower Inada condition, and prove the existence...

In this short note, we present a result on comparative skewness preferences. Using a simple risk sharing problem in a complete market, we show that an agent is more cautious than another agent if and only if his sharing rule is always a convex transformation of the other agent's. As a convex...

Should you buy a stock or a corporate bond? A common belief is that the Pratt-Arrow risk aversion measure gives the answer: a more risk averse investor will prefer more a corporate bond to a stock. However, this is not always true. In a simple portfolio problem with a riskless bond, a stock and...