Outside of a sole globally risk averse agent, all other agents in markets are risk seeking agents

Abstract

There exists debate as to whether markets consist of heterogeneous realizations of risk averse agents, or a mix of risk averse and risk seeking agents. This study provides formal theoretical evidence that agents in any market are parameterized by either of global risk aversion (preference for assets whose market beta (β) approximate one), or risk seeking preferences (preference for assets whose beta satisfy, β>1, β→∞). The demand for assets whose beta satisfy, β<1, β↛1, is premised, not on risk preferences, but on risk averse or risk seeking agents’ demand for positive Net Present Value assets that exhaust their investment capital.