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Positivity of bid-ask spreads and symmetrical monotone risk aversion*

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Abstract

A usual argument in finance refers to no arbitrage opportunities for the positivity of the bid-ask spread. Here we follow the decision theory approach and show that if positivity of the bid-ask spread is identified with strong risk aversion for an expected utility market-maker, this is no longer true for a rank-dependent expected utility one. For such a decision-maker only a very weak form of risk aversion is required, a result which seems more in accordance with his actual behavior. We conclude by showing that the no-trade interval result of Dow and Werlang (1992a) remains valid for a rank-dependent expected utility market-maker merely exhibiting this weak form of risk aversion.

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Authors and Affiliations

  1. CERMSEM, Université de Paris I, Maison des Sciences Economiques, 106–112 Bd de l'Hôpital, 75647, Paris Cedex 13, France

    Moez Abouda & Alain Chateauneuf

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  1. Moez Abouda
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  2. Alain Chateauneuf
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Abouda, M., Chateauneuf, A. Positivity of bid-ask spreads and symmetrical monotone risk aversion* . Theory and Decision 52, 149–170 (2002). https://doi.org/10.1023/A:1015560016516

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