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Bridge over ocean
1 September 2012 Financial Analysts Journal Volume 68, Issue 5

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

  1. Antti Ilmanen, PhD

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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