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An index of (absolute) correlation aversion: theory and some implications

  • David Crainich

    ()

    (CNRS-LEM and IESEG School of Management)

  • Louis Eeckhoudt

    (IESEG School of Management (LEM-CNRS) and and CORE (Université Catholique de Louvain))

  • Olivier Le Courtois

    (EM Lyon Business School)

The concept of absolute risk aversion proposed by K. Arrow (1965) and J. Pratt (1964) and the assumption that it is decreasing in wealth has played a central role in the analysis of risky choices. Ten years later S. Richard (1975) defined correlation aversion in the framework of bivariate utility functions. Surprisingly however the measure of the intensity of correlation aversion has received so far almost no attention. In this paper we define an index of (absolute) correlation aversion and stress some of its properties. Besides we show how the assumption that it is decreasing in wealth generates new results for the analysis of risky choices under bivariate utility. Finally we indicate how these notions can be extended to higher orders of risk attitudes.

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Paper provided by IESEG School of Management in its series Working Papers with number 2013-ECO-12.

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Length: 8 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:ies:wpaper:e201312
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  1. Denuit, Michel M. & Eeckhoudt, Louis, 2010. "Stronger measures of higher-order risk attitudes," Journal of Economic Theory, Elsevier, vol. 145(5), pages 2027-2036, September.
  2. David Crainich & Louis Eeckhoudt, 2008. "On the intensity of downside risk aversion," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 267-276, June.
  3. Denuit, Michel & Rey, Béatrice, 2010. "Prudence, temperance, edginess, and risk apportionment as decreasing sensitivity to detrimental changes," Mathematical Social Sciences, Elsevier, vol. 60(2), pages 137-143, September.
  4. Scott F. Richard, 1975. "Multivariate Risk Aversion, Utility Independence and Separable Utility Functions," Management Science, INFORMS, vol. 22(1), pages 12-21, September.
  5. Malevergne, Y. & Rey, B., 2009. "On cross-risk vulnerability," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 224-229, October.
  6. Louis Eeckhoudt & Béatrice Rey & Harris Schlesinger, 2007. "A Good Sign for Multivariate Risk Taking," Management Science, INFORMS, vol. 53(1), pages 117-124, January.
  7. DENUIT, Michel & EECKHOUDT, Louis, . "Stronger measures of higher-order risk attitudes," CORE Discussion Papers RP 2353, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Modica, Salvatore & Scarsini, Marco, 2005. "A note on comparative downside risk aversion," Journal of Economic Theory, Elsevier, vol. 122(2), pages 267-271, June.
  9. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
  10. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  11. repec:hal:journl:hal-00283446 is not listed on IDEAS
  12. CRAINICH, Davida & EECKHOUDT, Louis, . "On the intensity of downside risk aversion," CORE Discussion Papers RP 2061, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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