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

Georges DIONNE, Jingyuan LI

Research output: Working paperWorking paper series

Abstract

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.
Original languageEnglish
PublisherCIRRELT
Number of pages18
Publication statusPublished - Apr 2011
Externally publishedYes

Publication series

NameCIRRELT
No.CIRRELT-2011-24

Fingerprint

Background risk
Risk diversification
Risk aversion
Expected utility
Utility function
Dependent risks
Economics
Non-expected utility
Finance

Keywords

  • Expected utility theory
  • first-order conditional dependent risk aversion
  • background risk
  • risk diversification

Cite this

DIONNE, G., & LI, J. (2011). First-order (conditional) risk aversion, background risk and risk diversification. (CIRRELT; No. CIRRELT-2011-24). CIRRELT.
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First-order (conditional) risk aversion, background risk and risk diversification. / DIONNE, Georges; LI, Jingyuan.

CIRRELT, 2011. (CIRRELT; No. CIRRELT-2011-24).

Research output: Working paperWorking paper series

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DIONNE G, LI J. First-order (conditional) risk aversion, background risk and risk diversification. CIRRELT. 2011 Apr. (CIRRELT; CIRRELT-2011-24).