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Skewness Preference, Risk Aversion, and the Precedence Relations on Stochastic Changes

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  • W. Henry Chiu

    ()
    (School of Economic Studies, The University of Manchester, Manchester, M13 9PL, United Kingdom)

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    Abstract

    This paper provides a general choice-theoretic characterization of the trade-off between risk and skewness, whose importance in understanding risk-taking behavior is well documented in empirical studies. The condition under which the prudence measure (Kimball 1990) characterizes the strength of an individual's downside-risk aversion against his own risk aversion is identified and interpreted in a unifying framework based on the concept of one stochastic dominant change preceding another and that of the desirability of a stochastic change. The framework is also shown to be useful for a better understanding of the Arrow-Pratt measure, the stronger Ross measure, and the coincidence of the characterizations of downside-risk aversion and prudence, as well as the relationship between stochastic dominances of different degrees.

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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0431
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 51 (2005)
    Issue (Month): 12 (December)
    Pages: 1816-1828

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    Handle: RePEc:inm:ormnsc:v:51:y:2005:i:12:p:1816-1828

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    Related research

    Keywords: skewness preference; risk aversion; downside risk; Arrow-Pratt measure; prudence measure;

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    Cited by:
    1. Keenan, Donald C. & Snow, Arthur, 2010. "Greater prudence and greater downside risk aversion," Journal of Economic Theory, Elsevier, vol. 145(5), pages 2018-2026, September.
    2. Michel Denuit & Liqun Liu, 2014. "Decreasing higher-order absolute risk aversion and higher-degree stochastic dominance," Theory and Decision, Springer, vol. 76(2), pages 287-295, February.
    3. Nolan Miller & Alexander Wagner & Richard Zeckhauser, 2013. "Solomonic separation: Risk decisions as productivity indicators," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 265-297, June.
    4. repec:hal:journl:halshs-00336475 is not listed on IDEAS
    5. Menegatti, Mario, 2014. "New results on the relationship among risk aversion, prudence and temperance," European Journal of Operational Research, Elsevier, vol. 232(3), pages 613-617.
    6. EECKHOUDT, Louis & SCHELSINGER, Harris & TSETLIN, Ilia, . "Apportioning of risks via stochastic dominance," CORE Discussion Papers RP -2096, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Liu, Liqun & Meyer, Jack, 2013. "Substituting one risk increase for another: A method for measuring risk aversion," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2706-2718.
    8. Philip J. Grossman & Catherine C. Eckel, 2012. "Loving the Long Shot: Risk Taking with Skewed Lotteries," Development Research Unit Working Paper Series 41-12, Monash University, Department of Economics.
    9. Georges Dionne & Jingyuan Li & Cedric Okou, 2012. "An Extension of the Consumption-based CAPM Model," Cahiers de recherche 1214, CIRPEE.
    10. Donald Keenan & Arthur Snow, 2012. "The Schwarzian derivative as a ranking of downside risk aversion," Journal of Risk and Uncertainty, Springer, vol. 44(2), pages 149-160, April.

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