Journal of Finance Vol. 40 No. 1 1985
Risk Aversion and Arbitrage
Abstract
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.
- DOI
- 10.2307/2328059
- Volume
- 40
- Issue
- 1
- Pages
- 257
- Sources
- openalex crossref