Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2007:12: Rationalizing Constrained Contingent Claims

Anders Borglin (anders.borglin@nek.lu.se) and Sjur Flåm (sjur.flaam@econ.uib.no)
Additional contact information
Anders Borglin: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Sjur Flåm: Economics Department, Bergen University, Postal: Economics Department, Bergen University, Bergen, Norway

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

JEL-codes: C81; D01; G13

21 pages, June 25, 2007

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