Background risk and the demand for state-contingent claims

Richard Stapleton, Guenter Franke, Richard C. Stapleton, Marti G. Subrahmanyam

Research output: Contribution to journalArticlepeer-review


We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in background risk. We show that the conditions for standard risk aversion, that is positive, declining absolute risk aversion and prudence, are necessary and sufficient for generalized risk aversion.
Original languageEnglish
Pages (from-to)321-335
Number of pages14
JournalEconomic Theory
Issue number2
Publication statusPublished - Feb 2004


  • Background risk
  • Demand for tradable risk
  • Precautionary premium


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