Articlegreen1997

The Valuation of Nonsystematic Risks and the Pricing of Swedish Lottery Bonds

69 citations0/0 files storedReview of Financial Studies

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Financial Markets and Investment Strategies Stochastic processes and financial applications Credit Risk and Financial Regulations

Abstract

Swedish government lottery bonds have coupon payments determined by lottery. They offer a unique opportunity to study a security with uncertain payoffs having a known, observable distribution. The risk associated with the lotteries is idiosyncratic by construction and should not command a risk premium in equilibrium. The bonds are traded in two forms, allowing us to evaluate the rewards to bearing extra lottery risk. Despite its idiosyncratic nature, we find prices appear to reflect aversion to this risk. We evaluate the empirical determinants of this differential pricing and possible explanations for it.

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References

1976The arbitrage theory of capital asset pricing 1978Asset Prices in an Exchange Economy 1948The Utility Analysis of Choices Involving Risk 1979An intertemporal asset pricing model with stochastic consumption and investment opportunities 1983Do Sunspots Matter?1992Choice Under Uncertainty: Problems Solved and Unsolved 1987Choice Under Uncertainty: Problems Solved and Unsolved 1992Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets

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