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Linear-Risk-Tolerant, Invariant Risk Preferences

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  • Robert G. Chambers

    () (Dept of Agricultural and Resource Economics, University of Maryland, College Park)

  • John Quiggin

    () (Department of Economics, University of Queensland)

Abstract

Quiggin and Chambers have introduced the notion of invariant preferences, and shown that the only invariant expected-utility functionals are those associated with a quadratic utility function. This note identifies the class of preferences which simultaneously satisfy invariance, two-fund portfolio separation, and linear risk tolerance to determine if there exist meaningful classes of preferences, which inherit much of the quadratic family's theoretical and empirical tractability, but do not necessarily inherit its more unattractive properties when regarded as preferences over wealth.

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File URL: http://www.uq.edu.au/rsmg/WP/WPR04_3.pdf
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Bibliographic Info

Paper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR04_3.

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Date of creation: Apr 2004
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Handle: RePEc:rsm:riskun:r04_3

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Keywords: invariance;

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  1. Luenberger, David G., 1992. "Benefit functions and duality," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 461-481.
  2. Robert G. Chambers & John Quiggin, 2007. "Dual Approaches to the Analysis of Risk Aversion," Economica, London School of Economics and Political Science, vol. 74(294), pages 189-213, 05.
  3. Yaari, Menahem E., 1969. "Some remarks on measures of risk aversion and on their uses," Journal of Economic Theory, Elsevier, vol. 1(3), pages 315-329, October.
  4. Quiggin, John & Chambers, R.G.Robert G., 2004. "Invariant risk attitudes," Journal of Economic Theory, Elsevier, vol. 117(1), pages 96-118, July.
  5. Chambers, Robert G. & Chung, Yangho & Fare, Rolf, 1996. "Benefit and Distance Functions," Journal of Economic Theory, Elsevier, vol. 70(2), pages 407-419, August.
  6. Chambers, Robert G, 2001. "Consumer's Surplus As an Exact and Superlative Cardinal Welfare Indicator," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 105-19, February.
  7. Safra, Zvi & Segal, Uzi, 1998. "Constant Risk Aversion," Journal of Economic Theory, Elsevier, vol. 83(1), pages 19-42, November.
  8. Blackorby, Charles & Donaldson, David, 1980. "A Theoretical Treatment of Indices of Absolute Inequality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 107-36, February.
  9. Quiggin, John & Chambers, Robert G, 1998. "Risk Premiums and Benefit Measures for Generalized-Expected-Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 121-37, November.
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Cited by:
  1. Giamouridis, Daniel & Vrontos, Ioannis D., 2007. "Hedge fund portfolio construction: A comparison of static and dynamic approaches," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 199-217, January.

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