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Substituting one risk increase for another: A method for measuring risk aversion

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  • Liu, Liqun
  • Meyer, Jack

Abstract

This paper defines the rate of substitution of one stochastic change to a random variable for another. It then focuses on the case where one of these changes is an nth degree risk increase, and the other is an mth degree risk increase, where n>m⩾1. The paper shows that the rate of substitution for these two risk increases can be used to provide a broader definition and two additional characterizations of the nth degree Ross more risk averse partial order. The implications for local intensity measures of nth degree risk aversion are also examined. The analysis organizes the existing results as well as generates new ones.

Suggested Citation

  • Liu, Liqun & Meyer, Jack, 2013. "Substituting one risk increase for another: A method for measuring risk aversion," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2706-2718.
    • Handle: RePEc:eee:jetheo:v:148:y:2013:i:6:p:2706-2718
    DOI: 10.1016/j.jet.2013.10.002
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    More about this item

    Keywords

    Risk premium; Rate of substitution; Risk aversion; Comparative risk aversion; Expected utility model;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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