Multiplicative background risk
We consider random wealth of the multiplicative form xy, where x and y are statistically independent random variables. We assume that x is endogenous to the economic agent, but that y is an exogenous and uninsurable background risk. Our main focus is on how the randomness of y affects risk-taking behavior for decisions on the choice of x. We characterize conditions on preferences that lead to more cautious behavior. We also develop the concept of the affiliated utility function, which we define as the composition of the underlying utility function and the exponential function. This allows us to adapt several results for additive background risk to the multiplicative case.
|Date of creation:||2002|
|Contact details of provider:|| Postal: Reichpietschufer 50, 10785 Berlin, Germany|
Phone: ++49 - 30 - 25491 - 0
Fax: ++49 - 30 - 25491 - 684
Web page: http://www.wzb.eu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Miles S. Kimball, 1991.
"Standard Risk Aversion,"
NBER Technical Working Papers
0099, National Bureau of Economic Research, Inc.
- Pratt, John W, 1988. "Aversion to One Risk in the Presence of Others," Journal of Risk and Uncertainty, Springer, vol. 1(4), pages 395-413, December.
- Yacine Ait-Sahalia & Andrew W. Lo, 2000.
"Nonparametric Risk Management and Implied Risk Aversion,"
NBER Working Papers
6130, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Jens Carsten Jackwerth., 1996.
"Recovering Risk Aversion from Option Prices and Realized Returns,"
Research Program in Finance Working Papers
RPF-265, University of California at Berkeley.
- Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-451.
- Jens Carsten Jackwerth, 1998. "Recovering Risk Aversion from Option Prices and Realized Returns," Finance 9803002, EconWPA.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996.
"Income Risk, Borrowing Constraints, and Portfolio Choice,"
American Economic Review,
American Economic Association, vol. 86(1), pages 158-172, March.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
- Stephen A. Ross, 2004. "Compensation, Incentives, and the Duality of Risk Aversion and Riskiness," Journal of Finance, American Finance Association, vol. 59(1), pages 207-225, 02.
- Ogaki, Masao & Zhang, Qiang, 2001.
"Decreasing Relative Risk Aversion and Tests of Risk Sharing,"
Econometric Society, vol. 69(2), pages 515-526, March.
- Masao Ogaki & Qiang Zhang, 2000. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometric Society World Congress 2000 Contributed Papers 1588, Econometric Society.
- Masao Ogaki & Qiang Zhang, 1998. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Working Papers 98-02, Ohio State University, Department of Economics.
- Finkelshtain, Israel & Kella, Offer & Scarsini, Marco, 1999.
"On risk aversion with two risks,"
Journal of Mathematical Economics,
Elsevier, vol. 31(2), pages 239-250, March.
- Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
- Donald Meyer & Jack Meyer, 2005. "Relative Risk Aversion: What Do We Know?," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 243-262, December.
- Kihlstrom, Richard E & Romer, David & Williams, Steve, 1981. "Risk Aversion with Random Initial Wealth," Econometrica, Econometric Society, vol. 49(4), pages 911-920, June.
- Nachman, David C., 1982. "Preservation of "more risk averse" under expectations," Journal of Economic Theory, Elsevier, vol. 28(2), pages 361-368, December.
- Miles S. Kimball, 1989.
"Precautionary Saving in the Small and in the Large,"
NBER Working Papers
2848, National Bureau of Economic Research, Inc.
- Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
- Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249.
- Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-638, May.
- Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-1054, December.
- Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-1123, September.
When requesting a correction, please mention this item's handle: RePEc:zbw:wzbdiv:fsiv0206. 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: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.