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Infrequent Extreme Risks

Author

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  • C. Gourieroux

    (CREST, CEPREMAP and University of Toronto, e-mail: c.gourieroux@utoronto.ca)

  • A. Monfort

    (CNAM and CREST, Paris, e-mail: monfort@cnam.fr)

Abstract

The main tools and concepts of financial and actuarial theory are designed to handle standard, or even small risks. The aim of this paper is to reconsider some selected financial problems, in a setup including infrequent extreme risks. We first consider investors maximizing the expected utility function of their future wealth, and we establish the necessary and sufficient conditions on the utility function to ensure the existence of a non degenerate demand for assets with extreme risks. This new class of utility functions, called LIRA, does not contain the classical HARA and CARA utility functions, which are not adequate in this framework. Then we discuss the corresponding asset supply-demand equilibrium model. The Geneva Papers on Risk and Insurance Theory (2004) 29, 5–22. doi:10.1023/B:GEPA.0000032563.83435.50

Suggested Citation

  • C. Gourieroux & A. Monfort, 2004. "Infrequent Extreme Risks," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(1), pages 5-22, June.
    • Handle: RePEc:pal:genrir:v:29:y:2004:i:1:p:5-22
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    Cited by:

    1. Christian Gourieroux & Andrew Hencic & Joann Jasiak, 2021. "Forecast performance and bubble analysis in noncausal MAR(1, 1) processes," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(2), pages 301-326, March.
    2. Gourieroux, C. & Monfort, A., 2005. "The econometrics of efficient portfolios," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 1-41, January.
    3. Chollete, Loran & Jaffee, Dwight, 2009. "Economic Implications of Extreme and Rare Events," UiS Working Papers in Economics and Finance 2009/32, University of Stavanger.
    4. Chollete, Lorán & Jaffee, Dwight & Mamun, Khawaja A., 2022. "Policy suggestions from a simple framework with extreme outcomes," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 374-398.

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