Similarities between Greater Risk Aversion and Greater Downside Risk Aversion
نویسنده
چکیده
This paper characterizes downside risk aversion in a simple and intuitive manner. The characterization highlights certain features of downside risk aversion that are common with traditional risk aversion in regards the comparative statics of risk-free wealth. Also, using this characterization one can simplify considerably a theorem by Jindapon (2010) relating to greater downside risk aversion as measured by the prudence probability premium.
منابع مشابه
Allocative Downside Risk Aversion
Traditionally, downside risk aversion is the study of the placement of a pure risk (a secondary risk) on either the upside or the downside of a primary two-state risk. When the decision maker prefers to have the secondary risk placed on the upside rather than the downside of the primary lottery, he is said to display downside risk aversion. The literature on the intensity of downside risk avers...
متن کاملGreater downside risk aversion in the large
In this paper, we advance a definition of greater downside risk aversion that applies to both large and small changes in risk preference, and thereby complements the results for small changes reported previously. We show that a downside riskaverse transformation of a utility function results in a function that is more downside risk averse in the same manner that a risk-averse transformation inc...
متن کاملOn the lneffrciency of Portfolio Insurance and Caveats to the Mean/Downside-Risk Framework
Portfolio insurance strategies based on options typically treat the investment in the risky asset, e.g., stock, as fixed. We show in a mean/downside-risk framework that such a strategy is inefficient. Using at the money put options, expected returns can be increased by more than 250 basis points without taking on more risk. Gains can become arbitrarily large when one uses options with extremely...
متن کاملDecreasing downside risk aversion and background risk
In this paper, we show that risk vulnerability can be associatedwith the concept of downside risk aversion (DRA) and an assumption about its behavior, namely that it is decreasing inwealth. Specifically, decreasing downside risk aversion in the Arrow–Pratt and Ross senses are respectively necessary and sufficient for a zero-mean background risk to raise the aversion to other independent risks. ...
متن کاملApproximating Risk Aversion in Decision Analysis Applications
This paper investigates the impact of risk aversion in decision analyses under uncertainty with a single evaluation measure and presents a simple procedure for approximately addressing risk aversion in a way that is defensible for many decisions. Speci ̄cally, a simulation study is presented that leads to guidelines for determining when an expected utility analysis should be conducted for a deci...
متن کامل