Symmetrical Monotone Risk Aversion and Positive Bid-Ask Spreads

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


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.


Risk Aversion Risky Asset Reservation Price Arbitrage Opportunity Concave Utility Function 
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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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