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The Generalised Extreme Value Distribution as Utility Function

  • Denis Conniffe

    ()

    (Economics, National University of Ireland, Maynooth)

The idea that probability distribution functions could provide appropriate mathematical forms for utility functions representing risk aversion is of respectable antiquity. But the relatively few examples that have appeared in the economics literature have displayed quite restrictive risk aversion properties. This paper examines the potential of the generalised extreme value (GEV) distribution as utility function, showing it possesses considerable flexibility as regards risk aversion properties, even in its single parameter form. The paper concludes that the GEV utility function is worth considering for applications in cases where parametric parsimony matters.

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File URL: http://repec.maynoothuniversity.ie/mayecw-files/N1780907.pdf
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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1780907.

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Date of creation: 2007
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Handle: RePEc:may:mayecw:n1780907
Contact details of provider: Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
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Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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  1. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
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  6. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  7. Meyer, Donald J. & Meyer, Jack, 2005. "Risk preferences in multi-period consumption models, the equity premium puzzle, and habit formation utility," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1497-1515, November.
  8. Caballé, Jordi & Pomansky, Alexey, 1995. "Mixed Risk Aversion," Working Paper Series 444, Research Institute of Industrial Economics.
  9. Marvin H. Berhold, 1973. "The Use of Distribution Functions to Represent Utility Functions," Management Science, INFORMS, vol. 19(7), pages 825-829, March.
  10. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  11. Gregory, Nathaniel, 1980. "Relative Wealth and Risk Taking: A Short Note on the Friedman-Savage Utility Function," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1226-30, December.
  12. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
  13. Van Praag, Bernard M. S. & Kapteyn, Arie, 1973. "Further evidence on the individual welfare function of income: An empirical investigatiion in The Netherlands," European Economic Review, Elsevier, vol. 4(1), pages 33-62, April.
  14. Meyer, Jack, 2007. "Representing Risk Preferences in Expected Utility Based Decision Models," SCC-76 Meeting, March 15-17, 2007, Gulf Shores, Alabama 9380, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
  15. Manski, Charles F, 2001. " Daniel McFadden and the Econometric Analysis of Discrete Choice," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(2), pages 217-29, June.
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