Decreasing relative risk premium
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Decreasing relative risk premium. / Hansen, Frank.
In: Journal of Theoretical Economics, Vol. 7, No. 1, 2007, p. Art. 37.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Decreasing relative risk premium
AU - Hansen, Frank
N1 - JEL Classification: D8, G12
PY - 2007
Y1 - 2007
N2 - We consider the risk premium demanded by a decision maker in order to be indifferent between obtaining a new level of wealth with certainty, or to participate in a lottery which either results in unchanged wealth or an even higher level than what can be obtained with certainty. We study preferences such that the corresponding relative risk premium is a decreasing function of present wealth, and we determine the set of associated utility functions. We find a new characterization of risk vulnerability and determine a large set of utility functions, closed under summation and composition, which are both risk vulnerable and have decreasing relative risk premium. We finally introduce the notion of partial risk neutral preferences on binary lotteries and show that partial risk neutrality is equivalent to preferences with decreasing relative risk premium
AB - We consider the risk premium demanded by a decision maker in order to be indifferent between obtaining a new level of wealth with certainty, or to participate in a lottery which either results in unchanged wealth or an even higher level than what can be obtained with certainty. We study preferences such that the corresponding relative risk premium is a decreasing function of present wealth, and we determine the set of associated utility functions. We find a new characterization of risk vulnerability and determine a large set of utility functions, closed under summation and composition, which are both risk vulnerable and have decreasing relative risk premium. We finally introduce the notion of partial risk neutral preferences on binary lotteries and show that partial risk neutrality is equivalent to preferences with decreasing relative risk premium
KW - Faculty of Social Sciences
KW - expected utility theory
KW - relative risk premium
KW - risk vulnerability
KW - preferences on lotteries
KW - partial risk neutrality
M3 - Journal article
VL - 7
SP - Art. 37
JO - The B.E. Journal of Theoretical Economics
JF - The B.E. Journal of Theoretical Economics
SN - 2194-6124
IS - 1
ER -
ID: 1408703