Do Investors Need Kink to Cope with Ambiguity?

Research output: Contribution to journalArticlepeer-review


This study proposes a possible explanation for demand for derivatives that have kinks, such as plain vanilla options, using a market equilibrium model. In our setting, there is one risky asset and one ambiguous additive background risk, and a complete market exists for the risky asset. Under this environment, the optimal payoff function for an ambiguity-averse investor who has an exponential utility function exhibits kinks.

Original languageEnglish
Pages (from-to)391-397
Number of pages7
JournalInternational Review of Economics and Finance
Publication statusPublished - 2020 Nov


  • Ambiguity
  • Background risk
  • Kink
  • Multiple prior model

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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