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Risk, ambiguity, and Giffen assets

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  • Lanier, Joshua

Abstract

We provide necessary and sufficient conditions for the demand for financial assets to satisfy the law of demand (prices and quantity demanded move in opposite directions) when preferences take the expected utility, multiplier preferences, Choquet expected utility, and the maxmin expected utility forms. For the first three models the law of demand holds when the variation in the coefficient of relative risk aversion stays within a specified bound. Ensuring the law of demand holds in the maxmin expected utility model requires constant relative risk aversion.

Suggested Citation

  • Lanier, Joshua, 2020. "Risk, ambiguity, and Giffen assets," Journal of Economic Theory, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:jetheo:v:186:y:2020:i:c:s0022053118305751
    DOI: 10.1016/j.jet.2019.104976
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    References listed on IDEAS

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    1. Felix Kubler & Larry Selden & Xiao Wei, 2013. "Inferior Good and Giffen Behavior for Investing and Borrowing," American Economic Review, American Economic Association, vol. 103(2), pages 1034-1053, April.
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    4. John K.H. Quah, 2003. "The Law of Demand and Risk Aversion," Econometrica, Econometric Society, vol. 71(2), pages 713-721, March.
    5. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    6. Yakar Kannai & Larry Selden, 2014. "Violation of the Law of Demand," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(1), pages 1-28, January.
    7. Polterovich, Victor & Mityushin, Leonid, 1978. "Criteria for Monotonicity of Demand Functions," MPRA Paper 20097, University Library of Munich, Germany.
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    Cited by:

    1. Dong, Xueqi & Liu, Shuo Li, 2021. "Proportional Tax under Ambiguity," MPRA Paper 107668, University Library of Munich, Germany.
    2. Wang, Jiarui & Liu, Shancun & Yang, Haijun, 2022. "Institutional investor’ proportions and inactive trading," International Review of Financial Analysis, Elsevier, vol. 82(C).
    3. Soheil Ghili & Peter Klibanoff, 2021. "If It Is Surely Better, Do It More? Implications for Preferences Under Ambiguity," Management Science, INFORMS, vol. 67(12), pages 7619-7636, December.

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    More about this item

    Keywords

    Giffen goods; Expected utility; Ambiguity aversion; Choquet expected utility; Maxmin expected utility; Multiplier preferences; Law of demand;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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