Cautiousness, skewness preference, and demand for options

Huang, James and Stapleton, Richard (2014) Cautiousness, skewness preference, and demand for options. Review of Finance, 18 (6). pp. 2375-2395. ISSN 1572-3097

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Abstract

In this article we establish cautiousness as a new downside risk aversion measure, using a portfolio problem with a risk-free bond, a stock, and an option. We show that, an investor has higher cautiousness (i) if and only if she is always more likely to buy the option; and (ii) if and only if she always demands more options per share. As an option’s payoff is a convex function, increasing positions in the option increases the convexity of a portfolio, which leads to an increase in skewness. Thus the results in this article establish the link between cautiousness and skewness preference.

Item Type:
Journal Article
Journal or Publication Title:
Review of Finance
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2003
Subjects:
ID Code:
71749
Deposited By:
Deposited On:
14 Nov 2014 10:23
Refereed?:
Yes
Published?:
Published
Last Modified:
01 Jul 2020 01:53