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Stochastic dominance and absolute risk aversion

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  • Jordi Caballé
  • Joan Esteban

Abstract

In this paper we proose the infimum of the Arrow-Pratt index of absolute risk aversion as a measure of global risk aversion of a utility function. We then show that, for any given arbitrary pair of distributions, there exists a threshold level of global risk aversion such that all increasing concave utility functions with at least as much global risk aversion would rank the two distributions in the same way. Furthermore, this threshold level is sharp in the sense that, for any lower level of global risk aversion, we can find two utility functions in this class yielding opposite preference relations for the two distributions.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 643.

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Date of creation: Jul 2002
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Handle: RePEc:upf:upfgen:643

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Web page: http://www.econ.upf.edu/

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Keywords: Risk aversion; stochastic dominance;

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  1. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
  2. Meyer, Jack, 1975. "Increasing risk," Journal of Economic Theory, Elsevier, vol. 11(1), pages 119-132, August.
  3. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  4. repec:hal:cesptp:halshs-00211906 is not listed on IDEAS
  5. Miles S. Kimball, 1991. "Standard Risk Aversion," NBER Technical Working Papers 0099, National Bureau of Economic Research, Inc.
  6. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  7. Meyer, Jack, 1977. "Second Degree Stochastic Dominance with Respect to a Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 477-87, June.
  8. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
  9. Gollier, C. & Kimball, M.S., 1996. "New Methods in the Classical Economics of Uncertainty: Comparing Risks," Papers 96.412, Toulouse - GREMAQ.
  10. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  11. Caballé, Jordi & Pomansky, Alexey, 1995. "Mixed Risk Aversion," Working Paper Series 444, Research Institute of Industrial Economics.
  12. Lambert, Peter J. & Hey, John D., 1979. "Attitudes to risk," Economics Letters, Elsevier, vol. 2(3), pages 215-218.
  13. Shorrocks, Anthony F, 1983. "Ranking Income Distributions," Economica, London School of Economics and Political Science, vol. 50(197), pages 3-17, February.
  14. Chateauneuf, A. & Cohen, M. & Meilijson, I., 1997. "More Pessimism than Greediness: A Characterization of Monotone Risk Aversion in the Rank-Dependant Expected Utility Model," Papiers d'Economie Mathématique et Applications 97.53, Université Panthéon-Sorbonne (Paris 1).
  15. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
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Cited by:
  1. Eisenhauer, Joseph G., 2010. "Rank-ordering of risk preferences with conventional and discrete measures," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 291-297, August.
  2. Eisenhauer, Joseph G., 2006. "Risk aversion and prudence in the large," Research in Economics, Elsevier, vol. 60(4), pages 179-187, December.

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