Related papers: Local Utility and Multivariate Risk Aversion
We provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in a classic expected return maximization problem. For what we call the infimum of expectations class of risk measures, we show…
We present a theory of expected utility with state-dependent linear utility functions for monetary returns, that incorporates the possibility of loss-aversion. Our results relate to first order stochastic dominance, mean-preserving spread,…
This study investigates the influence of risk tolerance on the expected utility in the long run. We estimate the extent to which the expected utility of optimal portfolios is affected by small changes in the risk tolerance. For this…
Under expected utility the local index of absolute risk aversion has played a central role in many applications. Besides, its link with the "global" concepts of the risk and probability premia has reinforced its attractiveness. This paper…
We extend well-known comparative results under expected utility to models of non-expected utility by providing novel conditions on local utility functions. We illustrate how our results parallel, and are distinct from, existing results for…
In economics, risk aversion is modeled via a concave Bernoulli utility within the expected-utility paradigm. We propose a simple test of expected utility and concavity. We find little support for either: only 30 percent of the choices are…
Probabilistic risk aversion, defined through quasi-convexity in probabilistic mixtures, is a common useful property in decision analysis. We study a general class of non-monotone mappings, called the generalized rank-dependent functions,…
We characterize the family of utility functions satisfying linear fractional relative risk aversion (LFRRA) in terms of the Gauss hypergeometric functions. We apply this family, which nests various utility functions used in different…
This note will extend the research presented in Brown & Rogers (2009) to the case of CRRA agents. We consider the model outlined in that paper in which agents had diverse beliefs about the dividends produced by a risky asset. We now assume…
The expectation is an example of a descriptive statistic that is monotone with respect to stochastic dominance, and additive for sums of independent random variables. We provide a complete characterization of such statistics, and explore a…
Risk and utility functionals are fundamental building blocks in economics and finance. In this paper we investigate under which conditions a risk or utility functional is sensitive to the accumulation of losses in the sense that any…
We consider the economic problem of optimal consumption and investment with power utility. We study the optimal strategy as the relative risk aversion tends to infinity or to one. The convergence of the optimal consumption is obtained for…
Most people are risk-averse (risk-seeking) when they expect to gain (lose). Based on a generalization of ``expected utility theory'' which takes this into account, we introduce an automaton mimicking the dynamics of economic operations.…
A key issue in the estimation of energy hedges is the hedgers' attitude towards risk which is encapsulated in the form of the hedgers' utility function. However, the literature typically uses only one form of utility function such as the…
Modern portfolio theory(MPT) addresses the problem of determining the optimum allocation of investment resources among a set of candidate assets. In the original mean-variance approach of Markowitz, volatility is taken as a proxy for risk,…
Consider an investor trading dynamically to maximize expected utility from terminal wealth. Our aim is to study the dependence between her risk aversion and the distribution of the optimal terminal payoff. Economic intuition suggests that…
Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically been assigned an arbitrary value in the literature. This paper instead applies a GARCH-in-Mean (GARCH-M) model to estimate a time-varying…
I conduct Rabin's (2000) calibration exercise in the subjective expected utility realm. I show that the rejection of some risky bet by a risk-averse agent only implies the rejection of more extreme and less desirable bets and nothing more.
Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This…
Utility and risk are two often competing measurements on the investment success. We show that efficient trade-off between these two measurements for investment portfolios happens, in general, on a convex curve in the two dimensional space…