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Changes in Background Risk and Risk Taking Behavior

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Author Info
EECKHOUDT, Louis
Christian GOLLIER
Harris SCHLESINGER

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Abstract

We consider the effects of changes in the distribution of a background risk on the optimal risk taking behaviour of a risk- averse decision maker. In particular, we suppose that the background risk deteriorates via a first- or second-degree stochastic dominance shift. Our contention is that such a change in background wealth should lead the individual to behave in a more risk-averse manner in decisions concerning any other independent risk. We examine conditions on preferences that are both necessary and sufficient for all FSD or SSD changes in background wealth to entail this property. These conditions place restrictions on the stronger measure of risk aversion defined by Ross [1981].

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Paper provided by Risk and Insurance Archive in its series Working Papers with number 005.

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Date of creation: Jun 1994
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Handle: RePEc:wop:riskar:005

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Keywords: background risk properness strong risk aversion.

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gollier, Christian & John W. PRATT, 1993. "Weak Proper Risk Aversion And The Tempering Effect of Background Risk," Working Papers 018, Risk and Insurance Archive. [Downloadable!]
  2. Meyer, Jack & Ormiston, Michael B, 1985. "Strong Increases in Risk and Their Comparative Statics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 425-37, June. [Downloadable!] (restricted)
  3. Miles S. Kimball, 1991. "Standard Risk Aversion," NBER Technical Working Papers 0099, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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  5. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Douglas W. Elmendorf & Miles S. Kimball, 1996. "Taxation of labor income and the demand for risky assets," Finance and Economics Discussion Series 96-32, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Esö, Péter & White, Lucy, 2003. "Precautionary Bidding in Auctions," CEPR Discussion Papers 3975, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Louis Eeckhoudt & Harris Schlesinger, 2005. "Putting Risk in its Proper Place," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  3. Peter Eso & Lucy White, 2001. "Precautionary Bidding in Auctions," Discussion Papers 1331, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  4. Edward Schlee & Christian Gollier, . "Increased Risk-Bearing with Background Risk," Working Papers 2132848, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
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  5. Hennessy, David A. & Lapan, Harvey E., 2006. "On the Nature of Certainty Equivalent Functionals," Staff General Research Papers 12552, Iowa State University, Department of Economics.
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  6. Peter Eso & Lucy White, 2000. "Precautionary Bidding: First Price Auctions with Stochastic Private Values," Econometric Society World Congress 2000 Contributed Papers 1116, Econometric Society. [Downloadable!]
  7. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute. [Downloadable!]
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  8. K. Dachraoui & G. Dionne, 2001. "Stochastic Dominance and Optimal Portfolio," THEMA Working Papers 2001-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  9. Luc Arrondel & Hector Calvo-Pardo, 2002. "Portfolio Choice with a Correlated Background Risk : Theory and Evidence," DELTA Working Papers 2002-16, DELTA (Ecole normale supérieure). [Downloadable!]
  10. Asplund, Marcus, 1995. "Risk-Averse Firms in Oligopoly," Working Paper Series in Economics and Finance 69, Stockholm School of Economics, revised 21 Sep 1999. [Downloadable!]
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  11. Luis M. Viceira, 1999. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," NBER Working Papers 7409, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Luigi Guiso & Tullio Jappelli, 1998. "Background Uuncertainty and the Demand for Insurance against Insurable Risks," CSEF Working Papers 02, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
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  13. EECKHOUDT, Louis & Christian GOLLIER & Thierry SCHNEIDER, 1994. "Risk Aversion, Prudence and Temperance : A Unified Approach," Working Papers 006, Risk and Insurance Archive. [Downloadable!]
    Other versions:
  14. Günter Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 2005. "Incremental Risk Vulnerability," CoFE Discussion Paper 05-08, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
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