IDEAS home Printed from https://ideas.repec.org/p/cbt/econwp/10-61.html
   My bibliography  Save this paper

Allocative Downside Risk Aversion

Author

Listed:

Abstract

Traditionally, downside risk aversion is the study of the placement of a pure risk (a secondary risk) on either the upside or the downside of a primary two-state risk. When the decision maker prefers to have the secondary risk placed on the upside rather than the downside of the primary lottery, he is said to display downside risk aversion. The literature on the intensity of downside risk aversion has been clear on the point that greater prudence is not equivalent to greater downside risk aversion, although the two concepts are linked. In the present paper we present a new, and we argue equally natural, concept of the downside risk aversion of a decision maker, namely the fraction of a zero mean risk that the decision maker would optimally place on the upside. We then consider how this measure can be used to identify the intensity of downside risk aversion. Specifically, we show that greater downside risk aversion in our model can be accurately measured by a relationship that is very similar to, although somewhat stronger than, greater prudence.

Suggested Citation

  • Richard Watt & Francisco J. Vazquez, 2010. "Allocative Downside Risk Aversion," Working Papers in Economics 10/61, University of Canterbury, Department of Economics and Finance.
  • Handle: RePEc:cbt:econwp:10/61
    as

    Download full text from publisher

    File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1061.pdf
    Download Restriction: no

    More about this item

    Keywords

    risk aversion; prudence; downside risk;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbt:econwp:10/61. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Albert Yee). General contact details of provider: http://edirc.repec.org/data/decannz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.