An index of (absolute) correlation aversion: theory and some implications
AbstractThe concept of absolute risk aversion proposed by K. Arrow (1965) and J. Pratt (1964) and the assumption that it is decreasing in wealth has played a central role in the analysis of risky choices. Ten years later S. Richard (1975) defined correlation aversion in the framework of bivariate utility functions. Surprisingly however the measure of the intensity of correlation aversion has received so far almost no attention. In this paper we define an index of (absolute) correlation aversion and stress some of its properties. Besides we show how the assumption that it is decreasing in wealth generates new results for the analysis of risky choices under bivariate utility. Finally we indicate how these notions can be extended to higher orders of risk attitudes.
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Bibliographic InfoPaper provided by IESEG School of Management in its series Working Papers with number 2013-ECO-12.
Length: 8 pages
Date of creation: Jun 2013
Date of revision:
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-20 (All new papers)
- NEP-EVO-2013-07-20 (Evolutionary Economics)
- NEP-MIC-2013-07-20 (Microeconomics)
- NEP-UPT-2013-07-20 (Utility Models & Prospect Theory)
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