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Symmetrical Monotone Risk Aversion and Positive Bid-Ask Spreads

  • Moez Abouda
  • Alain Chateauneuf
Chapter
Part of the Theory and Decision Library book series (TDLB, volume 40)

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 becomes 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 (1992) remains valid for a rank-dependent expected utility market-maker merely exhibiting this weak form of risk aversion.

Keywords

Risk Aversion Risky Asset Reservation Price Arbitrage Opportunity Concave Utility Function 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media New York 1999

Authors and Affiliations

  • Moez Abouda
    • 1
  • Alain Chateauneuf
    • 1
  1. 1.CERMSEMUniversité de Paris IParis Cedex 13France

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