Henderson, Vicky and Hobson, David (David G.) (2013) Risk aversion, indivisible timing options and gambling. Operations Research, Volume 61 (Number 1). p. 126. doi:10.1287/opre.1120.1131 ISSN 0030-364X.

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Abstract

In this paper we model the behavior of a risk-averse agent who seeks to maximize expected utility and who has an indivisible asset and a timing option over when to sell this asset. Our main contribution is to show that, contrary to intuition, optimal behavior for such a risk-averse agent can include risk-increasing gambles. For example, a manager with a choice over when to disinvest from a project, a private homeowner with a property to sell, or an employee with a grant of American-style stock options may be better off taking positions in other assets with zero Sharpe ratio that are uncorrelated with the underlying project, house, or stock price risk. The results have wider implications for the modeling and interpretation of portfolio optimization problems involving American-style timing decisions.

Item Type:	Journal Article
Divisions:	Faculty of Science, Engineering and Medicine > Science > Statistics Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Operations Research
Publisher:	Institute for Operations Research and the Management Sciences (I N F O R M S)
ISSN:	0030-364X
Official Date:	January 2013
Dates:	Date Event January 2013 Published
Volume:	Volume 61
Number:	Number 1
Page Range:	p. 126
DOI:	10.1287/opre.1120.1131
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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