Both authors from Graduate School of Industrial Administration, Carnegie-Mellon University. We wish to thank Ken Singleton and the referee for helpful comments. The usual disclaimer applies.
Risk Aversion and Arbitrage
Article first published online: 30 APR 2012
1985 The American Finance Association
The Journal of Finance
Volume 40, Issue 1, pages 257–268, March 1985
How to Cite
GREEN, R. C. and SRIVASTAVA, S. (1985), Risk Aversion and Arbitrage. The Journal of Finance, 40: 257–268. doi: 10.1111/j.1540-6261.1985.tb04948.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.