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Risk Premiums versus Waiting-Options Premiums: A Simple Numerical Example

Author

Listed:
  • Miyazaki Kenji

    (Hosei University, miya_ken@hosei.ac.jp)

  • Saito Makoto

    (Hitotsubashi University, makoto@econ.hit-u.ac.jp)

Abstract

This paper investigates how interest rates on liquid assets and excess returns on risky assets are determined when only safe assets can be used as liquid assets when waiting for an informative signal of future payoffs. In particular, we carefully differentiate between a demand for liquid assets while waiting for new information and a demand for safe assets for precautionary reasons. Employing Kreps--Porteus preferences, numerical examples demonstrate that larger waiting-options premiums (lower interest rates) emerge with higher risk aversion in combination with more elastic intertemporal substitution.

Suggested Citation

  • Miyazaki Kenji & Saito Makoto, 2009. "Risk Premiums versus Waiting-Options Premiums: A Simple Numerical Example," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-31, March.
    • Handle: RePEc:bpj:bejtec:v:9:y:2009:i:1:n:7
    DOI: 10.2202/1935-1704.1326
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    Cited by:

    1. Miyazaki, Kenji & Saito, Makoto, 2004. "Preference for early resolution and commitment," Finance Research Letters, Elsevier, vol. 1(2), pages 113-118, June.

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