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:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 71749
Deposited By: ep_importer_pure
Deposited On: 14 Nov 2014 10:23
Refereed?: Yes
Published?: Published
Last Modified: 29 Jan 2020 07:44
URI: https://eprints.lancs.ac.uk/id/eprint/71749

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