Risk taking with additive and multiplicative background risks

Franke, Günter; Schlesinger, Harris; Stapleton, Richard C.

doi:10.1016/j.jet.2011.03.008

Cited by 66 publications

(38 citation statements)

References 20 publications

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“…For each unit of work, l 2 , the agent receives wage w but also suffers costs c(l 2 ). Bodie et al (1992) and Franke et al (2011) show that under non-stochastic income, agents increase their risky investment. Intuitively, a certain way to increase income expost serves as a kind of insurance towards adverse investment outcomes.…”

Section: Labor Supply Opportunitymentioning

confidence: 99%

“…12 Uncertain non-market wealth has two effects. First, if the minimum income is bounded away from zero and the variance of this income is sufficiently small, agents should again invest more in the risky asset in the first period (Franke et al 2011), i.e., a Labor > a N oAdjust . This is one likely scenario for the performance in the real-effort task.…”

Section: Labor Supply Opportunitymentioning

confidence: 99%

“…Flexibility acts as a type of insurance against adverse outcomes and is therefore predicted to increase risk exposure (Bodie et al 1992;Franke et al 2011). For example, the ability to vary labor hours or take an additional job maybe used as insurance against negative investment outcomes and therefore increase current risk exposure.…”

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confidence: 99%

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Circumstantial Risk: Impact of Future Tax Evasion and Labor Supply Opportunities on Risk Exposure

2014

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract This paper examines whether risk-taking in a lottery depends on the opportunity to respond to the lottery outcome through additional labor effort and/or tax evasion. Previous empirical attempts to answer this question face identification issues due to self selection into jobs that facilitate tax evasion and labor effort flexibility. We address these identification issues using a laboratory experiment (N = 180). Subjects have the opportunity to invest earned income in a lottery and, depending on randomly assigned treatment states, have the opportunity to respond to the lottery outcome through evasion and/or extra labor effort. We find strong evidence that ex-post access to labor opportunities reduces ex-ante risk willingness while access to tax evasion has no effect on risk behavior. We discuss possible explanations for this result based on the existing literature.JEL Classification: G11, H21, H24, H26, J22

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Section: Labor Supply Opportunitymentioning

confidence: 99%

Section: Labor Supply Opportunitymentioning

confidence: 99%

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Circumstantial Risk: Impact of Future Tax Evasion and Labor Supply Opportunities on Risk Exposure

2014

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“…Possibly, such instruments are both futures and options, which have been proved suitable for hedging linear or nonlinear risk. Second, Frank et al [2] pointed out that background risk, additive risk or multiplicative, was prevailing, which could not be ignored. Examples of background risks include uncertain labor income, uncertainty about the terminal value of fixed assets and so on.…”

Section: Introductionmentioning

confidence: 99%

Optimal Hedging with Options and Futures against Price Risk and Background Risk

Sun

2017

MCA

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On the condition that both futures and options exist in the markets for hedging, this paper examines the optimal hedging strategy under price risk and background risk. Compared with the previous research, which has studied options hedging against basis risk and production risk being extended to options and futures hedging against price risk and background risk, we proposed a model and have taken the budget of buying options into consideration. The model is fairly general and some existing models are special cases of it. We firstly derive the necessary and sufficient conditions that guarantee the optimality of an under-hedge, a full-hedge and an over-hedge of futures for the risk-averse utility. Then, sufficient conditions are stipulated under which an over-hedge is optimal. Furthermore, we propose a program minimizing of tail conditional expectation (TCE), which is inherently equivalent to the risk measure of expected shortfall risk (ES) or the conditional VaR (CVaR) under the continuous-time framework. Finally, we find that ES, in our proposed model, is significantly smaller than the one in the model of options hedging only. Therefore, the results emphasize the need for combining futures hedging and options hedging, and it also shows that imposing background risk, whether it be additive or multiplicative, always has a great impact on the hedging efficiency. We also present some sensitivities of the relevant parameters to provide some suggestions for the investors.

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“…, σ n ). This multiplicative model has been very popular in the literature (cf eg Tsetlin and Winkler 2005;Franke et al 2006Franke et al , 2011and references therein) due to reasons such as practical relevance and mathematical tractability.…”

Section: Introduction 2 the Background Risk Modelmentioning

confidence: 99%