TY - UNPB

T1 - First-order (conditional) risk aversion, background risk and risk diversification

AU - DIONNE, Georges

AU - LI, Jingyuan

PY - 2011/4

Y1 - 2011/4

N2 - In the literature, utility functions in the expected utility class are generically limited to second-order (conditional) risk aversion, while non-expected utility functions can exhibit either. First-order or second-order (conditional) risk aversion. This paper extends the concepts of orders of conditional risk aversion to orders of conditional dependent risk aversion. We show that first-order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis. We relate our results to risk diversification and provide additional insights into its application in different economic and finance examples.

AB - In the literature, utility functions in the expected utility class are generically limited to second-order (conditional) risk aversion, while non-expected utility functions can exhibit either. First-order or second-order (conditional) risk aversion. This paper extends the concepts of orders of conditional risk aversion to orders of conditional dependent risk aversion. We show that first-order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis. We relate our results to risk diversification and provide additional insights into its application in different economic and finance examples.

KW - Expected utility theory

KW - first-order conditional dependent risk aversion

KW - background risk

KW - risk diversification

UR - https://commons.ln.edu.hk/sw_master/2731

M3 - Working paper series

T3 - CIRRELT

BT - First-order (conditional) risk aversion, background risk and risk diversification

PB - CIRRELT

ER -