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Comparative Ross risk aversion in the presence of mean dependent risks

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  • Dionne, Georges
  • Li, Jingyuan

Abstract

This paper studies comparative risk aversion between risk averse agents in the presence of a background risk. Our contribution differs from most of the literature in two respects. First, background risk does not need to be additive or multiplicative. Second, the two risks are not necessarily mean independent, and may be conditional expectation increasing or decreasing. We show that our order of cross Ross risk aversion is equivalent to the order of partial risk premium, while our index of decreasing cross Ross risk aversion is equivalent to decreasing partial risk premium. These results generalize the comparative risk aversion model developed by Ross for mean independent risks. Our theoretical results are related to utility functions having the n-switch independence property.

Suggested Citation

  • Dionne, Georges & Li, Jingyuan, 2014. "Comparative Ross risk aversion in the presence of mean dependent risks," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 128-135.
  • Handle: RePEc:eee:mateco:v:51:y:2014:i:c:p:128-135
    DOI: 10.1016/j.jmateco.2013.08.001
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    References listed on IDEAS

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    Cited by:

    1. Georges Dionne & Jingyuan Li & Cedric Okou, 2012. "An Extension of the Consumption-based CAPM Model," Cahiers de recherche 1214, CIRPEE.
    2. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.

    More about this item

    Keywords

    Comparative cross Ross risk aversion; Dependent background risk; Partial risk premium; Decreasing cross Ross risk aversion; n-switch independence property;

    JEL classification:

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

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