Risk and Probability Premiums for Cara Utility Function
The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.
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|Date of creation:||01 Jul 1993|
|Date of revision:|
|Publication status:||Published in Journal of Agricultural and Resource Economics, July 1993, vol. 18 no. 1, pp. 17-24|
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