Risk and Probability Premiums for Cara Utility Function
AbstractThe risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 596.
Date of creation: 01 Jul 1993
Date of revision:
Publication status: Published in Journal of Agricultural and Resource Economics, July 1993, vol. 18 no. 1, pp. 17-24
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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Other versions of this item:
- Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), July.
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"Optimal choices among alternative technologies with stochastic yield,"
Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series
qt0gt334fc, Department of Agricultural & Resource Economics, UC Berkeley.
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