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Indifference pricing with uncertainty averse preferences

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  • Giammarino, Flavia
  • Barrieu, Pauline

Abstract

We consider the indifference valuation of an uncertain monetary payoff from the perspective of an uncertainty averse decision maker. We study how the indifference valuation depends on the decision maker’s attitudes toward uncertainty. We obtain a characterization of comparative uncertainty aversion and various characterizations of increasing, decreasing, and constant uncertainty aversion.

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File URL: http://mpra.ub.uni-muenchen.de/40636/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40636.

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Date of creation: 02 May 2011
Date of revision: 09 Mar 2012
Handle: RePEc:pra:mprapa:40636

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Keywords: Indifference Pricing; Uncertainty Aversion; Risk Measures; Quasiconvexity; Cash-Subadditivity;

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  1. Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Luigi Montrucchio, 2008. "Risk Measures: Rationality and Diversification," Carlo Alberto Notebooks, Collegio Carlo Alberto 100, Collegio Carlo Alberto.
  2. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  3. Hans Föllmer & Alexander Schied, 2002. "Convex measures of risk and trading constraints," Finance and Stochastics, Springer, Springer, vol. 6(4), pages 429-447.
  4. F J Anscombe & R J Aumann, 2000. "A Definition of Subjective Probability," Levine's Working Paper Archive 7591, David K. Levine.
  5. Frittelli, Marco & Rosazza Gianin, Emanuela, 2002. "Putting order in risk measures," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(7), pages 1473-1486, July.
  6. Marco Frittelli & Marco Maggis, 2011. "Conditional Certainty Equivalent," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 41-59.
  7. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2004. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Carlo Alberto Notebooks, Collegio Carlo Alberto 12, Collegio Carlo Alberto, revised 2006.
  8. Deprez, Olivier & Gerber, Hans U., 1985. "On convex principles of premium calculation," Insurance: Mathematics and Economics, Elsevier, vol. 4(3), pages 179-189, July.
  9. Cerreia-Vioglio, S. & Maccheroni, F. & Marinacci, M. & Montrucchio, L., 2011. "Uncertainty averse preferences," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(4), pages 1275-1330, July.
  10. Yaari, Menahem E., 1969. "Some remarks on measures of risk aversion and on their uses," Journal of Economic Theory, Elsevier, Elsevier, vol. 1(3), pages 315-329, October.
  11. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(3), pages 203-228.
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