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Distortion risk measures, ambiguity aversion and optimal effort

Author

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  • Christian Robert

    (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Pierre-Emmanuel Thérond

    (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

Abstract

We consider the class of concave distortion risk measures to study how choice is influenced by the decision-maker's attitude to risk and provide comparative static results. We also assume ambiguity about the probability distribution of the risk and consider a framework à la Klibanoff, Marinacci and Mukerji (2005) to study the value of information that resolves ambiguity. We show that this value increases with greater ambiguity, with greater ambiguity aversion, and in some cases with greater risk aversion. Finally we examine whether a more risk-averse and a more ambiguity-averse individual will invest in more effort to shift his initial risk distribution to a better target distribution.

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  • Christian Robert & Pierre-Emmanuel Thérond, 2014. "Distortion risk measures, ambiguity aversion and optimal effort," Post-Print hal-00813199, HAL.
    • Handle: RePEc:hal:journl:hal-00813199
    DOI: 10.1017/asb.2014.3
    Note: View the original document on HAL open archive server: https://hal.science/hal-00813199
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    References listed on IDEAS

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    Cited by:

    1. John A. Major & Stephen J. Mildenhall, 2020. "Pricing and Capital Allocation for Multiline Insurance Firms With Finite Assets in an Imperfect Market," Papers 2008.12427, arXiv.org.
    2. Martin Eling & Ruo Jia, 2017. "Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2014 Update," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 20(1), pages 63-77, March.

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    Keywords

    Ambiguity; dual theory; risk measures; distorsion; optimal effort;
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