Abstract
This article studies an agent's valuation of the right to trade in a complete contingent claims market. The proposed measure generalizes the Pratt (1964) risk premium, which captures the willingness to pay to replace a given risky wealth prospect with an actuarially equivalent, nonrisky wealth. Specifically, we define a generalized risk premium to be the willingness to pay to trade at going market prices. If state prices are actuarially fair, the Pratt premium is obtained as a special case. We derive several properties of this generalized premium and note its relationship to the option price of a public project under uncertainty.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 19-31 |
| Number of pages | 13 |
| Journal | Journal of Risk and Uncertainty |
| Volume | 6 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 1 1993 |
Keywords
- complete markets
- option price
- risk premium
- welfare under uncertainty
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics