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Monotone Risk Aversion

  • Lars Tyge Nielsen

This paper defines decreasing absolute risk aversion in purely behavioral terms without any assumption of differentiability and shows that a strictly increasing and risk averse utility function with decreasing absolute risk aversion is necessarily differentiable with an absolutely continuous derivative. A risk averse utility function has decreasing absolute risk aversion if and only if it has a decreasing absolute risk aversion density, and if and only if the cumulative absolute risk aversion function is increasing and concave. This leads to a characterization of all such utility functions. Analogues of these results also hold for increasing absolute and for increasing and decreasing relative risk aversion.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/2003/0310.pdf/
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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 03-10.

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Length: 19 pages
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:kud:kuiedp:0310
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