Positivity of bid-ask spreads and symmetrical monotone risk aversion

Theory and Decision 52 (2):149-170 (2002)
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 is 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 (1992a) remains valid for a rank-dependent expected utility market-maker merely exhibiting this weak form of risk aversion
Keywords Bid-ask spread  Hedging  Risk aversion  SMRA
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DOI 10.1023/A:1015560016516
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