Skewness Preference, Risk Aversion, and the Precedence Relations on Stochastic Changes
AbstractThis 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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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 51 (2005)
Issue (Month): 12 (December)
skewness preference; risk aversion; downside risk; Arrow-Pratt measure; prudence measure;
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- 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.
- 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.
- Louis Eeckhoudt & Harris Schlesinger & Ilia Tsetlin, 2008.
"Apportioning of Risks via Stochastic Dominance,"
CESifo Working Paper Series
2467, CESifo Group Munich.
- repec:hal:journl:halshs-00336475 is not listed on IDEAS
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