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When Is a Risky Asset “Urgently Needed”? †

When Is a Risky Asset “Urgently Needed”? † Abstract Risk free asset demand in the classic portfolio problem is shown to decrease with income if and only if the consumer's uncertainty preferences over assets satisfy the preference condition that the risk free asset is more readily substituted for the risky asset as the quantity of the latter increases. In this case, the risky asset is said to be “urgently needed” following the terminology of the classic certainty analysis of Johnson (1913). The urgently needed property tends to be more readily satisfied in uncertainty versus certainty settings. Asset pricing implications of this property are provided. (JEL D11, D53, D81, G11, G12 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

When Is a Risky Asset “Urgently Needed”? †

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Publisher
American Economic Association
Copyright
Copyright © 2014 by the American Economic Association
Subject
Articles
ISSN
1945-7685
eISSN
1945-7685
DOI
10.1257/mic.6.2.131
Publisher site
See Article on Publisher Site

Abstract

Abstract Risk free asset demand in the classic portfolio problem is shown to decrease with income if and only if the consumer's uncertainty preferences over assets satisfy the preference condition that the risk free asset is more readily substituted for the risky asset as the quantity of the latter increases. In this case, the risky asset is said to be “urgently needed” following the terminology of the classic certainty analysis of Johnson (1913). The urgently needed property tends to be more readily satisfied in uncertainty versus certainty settings. Asset pricing implications of this property are provided. (JEL D11, D53, D81, G11, G12 )

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: May 1, 2014

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