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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2007:12:
Rationalizing Constrained Contingent Claims

Anders Borglin () and Sjur Flåm ()

Abstract: Choice of contingent claims could reflect risk aversion or pessimism. Accordingly, the underlying, but hidden preferences might fit expected utility of customary von Neumann-Morgenstern form - or more generally, comply with a Choquet integral. This paper considers constrained choice and rationalizes both sorts of attitudes. Two avenues are pursued: one invokes complete orders; the other contends with partial ordering. Emphasis is on incomplete financial markets, featuring nonlinear pricing.

Keywords: Nonlinear price; Risk or uncertainty aversion; Choquet integral; Stochastic order; Incomplete preferences; (follow links to similar papers)

JEL-Codes: C81; D01; G13; (follow links to similar papers)

21 pages, June 25, 2007

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