Decreasing Downside Risk Aversion and Background Risk

David Crainich, Louis Eeckhoudt and Olivier Le Courtois
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Olivier Le Courtois: EM Lyon Business School

No 2013-ECO-21, Working Papers from IESEG School of Management

Abstract: To analyze the impact of background risks, decreasing absolute risk aversion (DARA) must be combined with other restrictions on the shape of the utility function in order to make preferences risk vulnerable. In this note, we indicate that risk vulnerability can also be associated with the sole assumption of decreasing downside risk aversion (DDRA). That is, no matter how absolute risk aversion changes with wealth, DDDRA in the Arrow-Pratt sense and DDRA in the Ross sense are shown to be respectively necessary and sufficient for a background risk to raise the aversion to other independent risks.

Keywords: Downside Risk Aversion; Background Risk; Risk Vulnerability (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2013-10
New Economics Papers: this item is included in nep-mic and nep-upt
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Related works:
Journal Article: Decreasing downside risk aversion and background risk (2014)
Working Paper: Decreasing downside risk aversion and background risk (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ies:wpaper:e201321

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