Risk Aversion and Risk Premiums with Dependent Risks

Jingyuan LI, Harris SCHLESINGER, Zhe YANG

Research output: Other Conference ContributionsConference Paper (other)Researchpeer-review

Abstract

By using a general bivariate utility function, this paper provides the conditions under which agents would like to remove primary risk in the presence of other dependent risk. For small risks, the conditions for retaining primary risk along with other dependent risk are also provided. The results of this paper indicate that the risk attitude to primary risk depends not only on the dependence relation between the risks, but also on the sign of the second-order cross derivatives of the utility function. In addition, agents also estimate the relative magnitude between the covariance of the risks and variance of the primary risk when they consider retaining the primary risk. Moreover, this paper examines the relation between risk premium for removing all risk simultaneously and those for removing risk sequentially. Rey’s (2003a) method to compare the total risk premium with the sum of the partial risk premiums is generalized to the case where there exists dependence relation between risks.
Original languageEnglish
Publication statusPublished - 5 Aug 2015
EventThe World Risk and Insurance Economics Congress 2015 - LMU Main Building, Geschwister-Scholl-Platz 1, Munich, Germany
Duration: 2 Aug 20156 Aug 2015
http://www.wriec.net/

Conference

ConferenceThe World Risk and Insurance Economics Congress 2015
CountryGermany
CityMunich
Period2/08/156/08/15
Internet address

Fingerprint

Dependent risks
Risk aversion
Risk premium
Utility function
Total risk
Derivatives
Risk attitude

Keywords

  • risk aversion
  • risk premium
  • dependent risk
  • bivariate utility function

Cite this

LI, J., SCHLESINGER, H., & YANG, Z. (2015). Risk Aversion and Risk Premiums with Dependent Risks. Paper presented at The World Risk and Insurance Economics Congress 2015, Munich, Germany.
LI, Jingyuan ; SCHLESINGER, Harris ; YANG, Zhe. / Risk Aversion and Risk Premiums with Dependent Risks. Paper presented at The World Risk and Insurance Economics Congress 2015, Munich, Germany.
@conference{c7d0e86be6c941a68945b9f71374561c,
title = "Risk Aversion and Risk Premiums with Dependent Risks",
abstract = "By using a general bivariate utility function, this paper provides the conditions under which agents would like to remove primary risk in the presence of other dependent risk. For small risks, the conditions for retaining primary risk along with other dependent risk are also provided. The results of this paper indicate that the risk attitude to primary risk depends not only on the dependence relation between the risks, but also on the sign of the second-order cross derivatives of the utility function. In addition, agents also estimate the relative magnitude between the covariance of the risks and variance of the primary risk when they consider retaining the primary risk. Moreover, this paper examines the relation between risk premium for removing all risk simultaneously and those for removing risk sequentially. Rey’s (2003a) method to compare the total risk premium with the sum of the partial risk premiums is generalized to the case where there exists dependence relation between risks.",
keywords = "risk aversion, risk premium, dependent risk, bivariate utility function",
author = "Jingyuan LI and Harris SCHLESINGER and Zhe YANG",
year = "2015",
month = "8",
day = "5",
language = "English",
note = "The World Risk and Insurance Economics Congress 2015 ; Conference date: 02-08-2015 Through 06-08-2015",
url = "http://www.wriec.net/",

}

LI, J, SCHLESINGER, H & YANG, Z 2015, 'Risk Aversion and Risk Premiums with Dependent Risks' Paper presented at The World Risk and Insurance Economics Congress 2015, Munich, Germany, 2/08/15 - 6/08/15, .

Risk Aversion and Risk Premiums with Dependent Risks. / LI, Jingyuan; SCHLESINGER, Harris; YANG, Zhe.

2015. Paper presented at The World Risk and Insurance Economics Congress 2015, Munich, Germany.

Research output: Other Conference ContributionsConference Paper (other)Researchpeer-review

TY - CONF

T1 - Risk Aversion and Risk Premiums with Dependent Risks

AU - LI, Jingyuan

AU - SCHLESINGER, Harris

AU - YANG, Zhe

PY - 2015/8/5

Y1 - 2015/8/5

N2 - By using a general bivariate utility function, this paper provides the conditions under which agents would like to remove primary risk in the presence of other dependent risk. For small risks, the conditions for retaining primary risk along with other dependent risk are also provided. The results of this paper indicate that the risk attitude to primary risk depends not only on the dependence relation between the risks, but also on the sign of the second-order cross derivatives of the utility function. In addition, agents also estimate the relative magnitude between the covariance of the risks and variance of the primary risk when they consider retaining the primary risk. Moreover, this paper examines the relation between risk premium for removing all risk simultaneously and those for removing risk sequentially. Rey’s (2003a) method to compare the total risk premium with the sum of the partial risk premiums is generalized to the case where there exists dependence relation between risks.

AB - By using a general bivariate utility function, this paper provides the conditions under which agents would like to remove primary risk in the presence of other dependent risk. For small risks, the conditions for retaining primary risk along with other dependent risk are also provided. The results of this paper indicate that the risk attitude to primary risk depends not only on the dependence relation between the risks, but also on the sign of the second-order cross derivatives of the utility function. In addition, agents also estimate the relative magnitude between the covariance of the risks and variance of the primary risk when they consider retaining the primary risk. Moreover, this paper examines the relation between risk premium for removing all risk simultaneously and those for removing risk sequentially. Rey’s (2003a) method to compare the total risk premium with the sum of the partial risk premiums is generalized to the case where there exists dependence relation between risks.

KW - risk aversion

KW - risk premium

KW - dependent risk

KW - bivariate utility function

UR - http://www.wriec.net/concurrent-sessions-v-vi/

M3 - Conference Paper (other)

ER -

LI J, SCHLESINGER H, YANG Z. Risk Aversion and Risk Premiums with Dependent Risks. 2015. Paper presented at The World Risk and Insurance Economics Congress 2015, Munich, Germany.