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Risk Aversion and Arbitrage
Author(s) -
GREEN RICHARD C.,
SRIVASTAVA SANJAY
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb04948.x
Subject(s) - arbitrage , economics , risk aversion (psychology) , dual (grammatical number) , stochastic game , consumption (sociology) , index arbitrage , asset (computer security) , mathematical economics , zero (linguistics) , fundamental theorem of asset pricing , econometrics , fixed income arbitrage , incomplete markets , arbitrage pricing theory , microeconomics , expected utility hypothesis , capital asset pricing model , financial economics , risk arbitrage , computer science , art , social science , linguistics , philosophy , literature , computer security , sociology
This paper characterizes conditions under which asset returns and consumption are consistent with risk‐averse preferences. It is shown that risk aversion is equivalent to “zero arbitrage” on a transformation of the payoff space. The implicit state prices which are dual to this no‐arbitrage condition can be interpreted as prices of “pure consumption hedges.” This zero‐arbitrage restriction implies the usual restrictions associated with nonsatiation. The analysis holds in both complete and incomplete market settings.