Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?

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Financial Analysts Journal
September/October 2012 | Vol. 68 | No. 5 | 11 pages
Source: CFA Institute
Antti Ilmanen

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Selling financial investments with insurance or lottery characteristics should earn positive long-run premiums if investors like positive skewness enough to overpay for these characteristics. The empirical evidence is unambiguous: Selling insurance and selling lottery tickets have delivered positive long-run rewards in a wide range of investment contexts. Conversely, buying financial catastrophe insurance and holding speculative lottery-like investments have delivered poor long-run rewards. Thus, bearing small risks is often well rewarded, bearing large risks not.

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