Comparative Ross risk aversion in the presence of quadrant dependent risks

No 12-7, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: This paper studies comparative risk aversion between risk averse agents in the presence of a background risk. Although the literature covers this question extensively, our contribution di§ers from most of the literature in two respects. First, background risk does not need to be additive or multiplicative. Second, the two risks are not necessary mean independent, and may be quadrant dependent. We show that our order of cross Ross risk aversion is equivalent to that of partial risk premium, while our index of decreasing cross Ross risk aversion is equivalent to that of a decreasing partial risk premium. These results generalize the comparative risk aversion model developed by Ross (1981) for mean independent risks. Finally, we show that decreasing cross Ross risk aversion gives rise to the utility function family belonging to the class of n-switch utility functions.

Keywords: Comparative cross Ross risk aversion; quadrant dependent background risk; partial risk premium; decreasing cross Ross risk aversion; n-switch utility functions (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2012-06-05
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Related works:
Working Paper: Comparative Ross Risk Aversion in the Presence of Quadrant Dependent Risks (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2012_007

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