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.
Presented at the 8th conference on the Foundations and Applications of Utility, Risk and Decision Theory, Mons (Belgium), July 2–5, 1997.
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Abouda, M., Chateauneuf, A. (1999). Symmetrical Monotone Risk Aversion and Positive Bid-Ask Spreads. In: Machina, M.J., Munier, B. (eds) Beliefs, Interactions and Preferences in Decision Making. Theory and Decision Library, vol 40. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-4592-4_19
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DOI: https://doi.org/10.1007/978-1-4757-4592-4_19
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