Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/32180
Authors: 
Franke, Günter
Schlesinger, Harris
Stapleton, Richard C.
Year of Publication: 
2007
Series/Report no.: 
Discussion paper series // Zentrum für Finanzen und Ökonometrie, Universität Konstanz 2007,11
Abstract: 
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 of these risks are added to portfolio value and have been amply studied, others are multiplicative in nature and have received far less attention. Moreover, the combined effects of multiple risks lead to some seemingly paradoxical choice behavior. We rationalize such behavior and we show how non-portfolio risks might lead to seemingly U-shaped relative risk aversion for a representative investor, as found empirically by Ait-Sahilia and Lo (2000) and Jackwerth (2000).
Subjects: 
Portfolio choice
Derived relative risk aversion
Additive background risk
Multiplicative background risk
JEL: 
G11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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