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Financial risk taking in the presence of correlated non-financial background risk

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  • Henry Chiu, W.

Abstract

This paper characterizes the stochastic deterioration resulting from taking a zero-mean financial risk in the presence of correlated non-financial background risk. We show in particular that it has an equivalent stochastic order as well as a necessary and sufficient “integral condition” that implies and is implied by a particular sense in which the stochastic deterioration can be decomposed into a “correlation increase” and a “marginal risk increase”. We further characterize a measure of aversion to the stochastic deterioration. These characterizations provide for a more general framework for formulating concepts of increases in risk and correlation and for better understanding risk management decisions governed by individuals’ attitudes to them.

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  • Henry Chiu, W., 2020. "Financial risk taking in the presence of correlated non-financial background risk," Journal of Mathematical Economics, Elsevier, vol. 88(C), pages 167-179.
    • Handle: RePEc:eee:mateco:v:88:y:2020:i:c:p:167-179
    DOI: 10.1016/j.jmateco.2020.03.004
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    2. Wong, Kit Pong, 2021. "Comparative risk aversion with two risks," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    3. Wong, Kit Pong, 2022. "Diversification and risk attitudes toward two risks," Journal of Mathematical Economics, Elsevier, vol. 102(C).

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