Precautionary paying for stochastic improvements under background risks

Hongxia WANG, Jianli WANG*, Jingyuan LI, Xinping XIA

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)

7 Citations (Scopus)

Abstract

In a two-dimensional framework, we propose a general two-period decision model which extends the temporal precautionary saving and effort model. We relate the role of cross-prudence to the impact of background risks on paying for stochastic improvements of the future risk. We find that the effect of background risks introduced in the first period is consistent to signing cross derivatives of bivariate utility functions, which is independent of the type of stochastic improvements brought by additional paying; however, when the background risk occurs in the second period, that is not the case.
Original languageEnglish
Pages (from-to)180-185
Number of pages6
JournalInsurance : Mathematics and Economics
Volume64
Early online date3 Jun 2015
DOIs
Publication statusPublished - Sep 2015

Fingerprint

Background risk
Precautionary saving
Derivatives
Decision model
Utility function
Prudence

Keywords

  • Background risk
  • Cross-prudence
  • Precautionary effort
  • Precautionary saving
  • Stochastic improvements

Cite this

WANG, Hongxia ; WANG, Jianli ; LI, Jingyuan ; XIA, Xinping. / Precautionary paying for stochastic improvements under background risks. In: Insurance : Mathematics and Economics. 2015 ; Vol. 64. pp. 180-185.
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Precautionary paying for stochastic improvements under background risks. / WANG, Hongxia; WANG, Jianli; LI, Jingyuan; XIA, Xinping.

In: Insurance : Mathematics and Economics, Vol. 64, 09.2015, p. 180-185.

Research output: Journal PublicationsJournal Article (refereed)

TY - JOUR

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AU - WANG, Hongxia

AU - WANG, Jianli

AU - LI, Jingyuan

AU - XIA, Xinping

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N2 - In a two-dimensional framework, we propose a general two-period decision model which extends the temporal precautionary saving and effort model. We relate the role of cross-prudence to the impact of background risks on paying for stochastic improvements of the future risk. We find that the effect of background risks introduced in the first period is consistent to signing cross derivatives of bivariate utility functions, which is independent of the type of stochastic improvements brought by additional paying; however, when the background risk occurs in the second period, that is not the case.

AB - In a two-dimensional framework, we propose a general two-period decision model which extends the temporal precautionary saving and effort model. We relate the role of cross-prudence to the impact of background risks on paying for stochastic improvements of the future risk. We find that the effect of background risks introduced in the first period is consistent to signing cross derivatives of bivariate utility functions, which is independent of the type of stochastic improvements brought by additional paying; however, when the background risk occurs in the second period, that is not the case.

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KW - Cross-prudence

KW - Precautionary effort

KW - Precautionary saving

KW - Stochastic improvements

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