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On the intensity of downside risk aversion

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  • CRAINICH, Davida
  • EECKHOUDT, Louis

Abstract

The degree of downside risk aversion (or equivalently prudence) is so far usually measured by -U'''/U''. We propose here another measure, U'''/U', which has interesting properties, different from those related to -U'''/U''. It also appears that the two measures are not mutually exclusive. Instead, they seem to be rather complementary as shown through an economic application.

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File URL: http://dx.doi.org/10.1007/s11166-008-9037-x
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -2061.

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Handle: RePEc:cor:louvrp:-2061

Note: In : Journal of Risk and Uncertainty, 36, 267-276, 2008
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  1. Scott, Robert C & Horvath, Philip A, 1980. " On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, American Finance Association, vol. 35(4), pages 915-19, September.
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  3. Keenan, Donald C & Snow, Arthur, 2002. " Greater Downside Risk Aversion," Journal of Risk and Uncertainty, Springer, Springer, vol. 24(3), pages 267-77, May.
  4. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
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  6. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 280-289, March.
  7. Jérôme Foncel & Nicolas Treich, 2005. "Fear of Ruin," Journal of Risk and Uncertainty, Springer, Springer, vol. 31(3), pages 289-300, December.
  8. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, Econometric Society, vol. 64(5), pages 1109-23, September.
  9. Menezes, C & Geiss, C & Tressler, J, 1980. "Increasing Downside Risk," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 921-32, December.
  10. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 621-38, May.
  11. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  12. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 8(3), pages 337-360, July.
  13. Jindapon, Paan & Neilson, William S., 2007. "Higher-order generalizations of Arrow-Pratt and Ross risk aversion: A comparative statics approach," Journal of Economic Theory, Elsevier, Elsevier, vol. 136(1), pages 719-728, September.
  14. Modica, Salvatore & Scarsini, Marco, 2005. "A note on comparative downside risk aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 122(2), pages 267-271, June.
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Cited by:
  1. David Crainich & Louis Eeckhoudt & James K. Hammitt, 2013. "The Value of Risk Reduction: New Tools for an Old Problem," Working Papers 2013-ECO-13, IESEG School of Management.
  2. Keenan, Donald C. & Snow, Arthur, 2010. "Greater prudence and greater downside risk aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(5), pages 2018-2026, September.
  3. Donald Keenan & Arthur Snow, 2012. "The Schwarzian derivative as a ranking of downside risk aversion," Journal of Risk and Uncertainty, Springer, Springer, vol. 44(2), pages 149-160, April.
  4. Jouini, Elyès & Napp, Clotilde & Nocetti, Diego, 2013. "On multivariate prudence," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(3), pages 1255-1267.
  5. Sebastian Ebert & Daniel Wiesen, 2009. "An experimental methodology testing for prudence and third-order preferences," Bonn Econ Discussion Papers, University of Bonn, Germany bgse21_2009, University of Bonn, Germany.
  6. Christian Gollier & James Hammitt & Nicolas Treich, 2013. "Risk and choice: A research saga," Journal of Risk and Uncertainty, Springer, Springer, vol. 47(2), pages 129-145, October.
  7. Kim, Kwansoo & Chavas, Jean-Paul & Barham, Bradford L. & Foltz, Jeremy D., 2012. "Rice, Irrigation and Downside Risk: A Quantile Analysis of Risk Exposure and Mitigation on Korean Farms," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124814, Agricultural and Applied Economics Association.
  8. Liqun Liu & Jack Meyer, 2013. "Normalized measures of concavity and Ross’s strongly more risk averse order," Journal of Risk and Uncertainty, Springer, Springer, vol. 47(2), pages 185-198, October.
  9. Richard Watt, 2011. "A note on greater downside risk aversion," ICER Working Papers, ICER - International Centre for Economic Research 17-2011, ICER - International Centre for Economic Research.
  10. Georges Dionne & Jingyuan Li & Cedric Okou, 2012. "An Extension of the Consumption-based CAPM Model," Cahiers de recherche, CIRPEE 1214, CIRPEE.
  11. Jindapon, Paan, 2010. "Prudence probability premium," Economics Letters, Elsevier, Elsevier, vol. 109(1), pages 34-37, October.
  12. Jindapon, Paan, 2013. "Do risk lovers invest in self-protection?," Economics Letters, Elsevier, Elsevier, vol. 121(2), pages 290-293.
  13. Liu, Liqun & Meyer, Jack, 2013. "Substituting one risk increase for another: A method for measuring risk aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(6), pages 2706-2718.
  14. Liqun Liu & Jack Meyer, 2012. "Decreasing absolute risk aversion, prudence and increased downside risk aversion," Journal of Risk and Uncertainty, Springer, Springer, vol. 44(3), pages 243-260, June.
  15. repec:hal:journl:halshs-00336475 is not listed on IDEAS
  16. repec:hal:wpaper:halshs-00635558 is not listed on IDEAS
  17. David Crainich & Louis Eeckhoudt & Olivier Le Courtois, 2013. "An index of (absolute) correlation aversion: theory and some implications," Working Papers 2013-ECO-12, IESEG School of Management.

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