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Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules

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  • Hara, Chiaki
  • Huang, James
  • Kuzmics, Christoph

Abstract

We study the representative consumer's risk attitude and efficient risk-sharing rules in a singleperiod, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumer's individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/14542/1/pie_dp323.pdf
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Bibliographic Info

Paper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series Discussion Paper with number 323.

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Length: 27 p.
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:hit:piedp2:323

Note: November 6, 2006
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Keywords: Aggregation; heterogeneous consumers; absolute risk tolerance; mutual fund theorem;

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  2. Guenter Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "When are Options Overpriced? The Black-Scholes Model and Alternative Characterisations of the Pricing Kernel," Finance 9904004, EconWPA.
  3. Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," KIER Working Papers 620, Kyoto University, Institute of Economic Research.
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