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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Higher-order risk vulnerability
AU - Huang, Xiaoping
AU - Stapleton, Richard Christopher
N1 - The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-015-0935-2
PY - 2017/2
Y1 - 2017/2
N2 - We add an independent unfair background risk to higher-order risk-takingmodels in the current literature and examine its interaction with the main risk underconsideration. Parallel to the well-known concept of risk vulnerability, which is definedby Gollier and Pratt (Econometrica 64:1109–1123, 1996), an agent is said to have atype of higher-order risk vulnerability if adding an independent unfair background riskto wealth raises his level of this type of higher-order risk aversion. We derive necessaryand sufficient conditions for all types of higher-order risk vulnerabilities and explaintheir behavioral implications. We find that as in the case of risk vulnerability, allfamiliar HARA utility functions have all types of higher-order risk vulnerabilitiesexcept for a type of third-order risk vulnerability corresponding to a downside riskaversion measure called the Schwarzian derivative.
AB - We add an independent unfair background risk to higher-order risk-takingmodels in the current literature and examine its interaction with the main risk underconsideration. Parallel to the well-known concept of risk vulnerability, which is definedby Gollier and Pratt (Econometrica 64:1109–1123, 1996), an agent is said to have atype of higher-order risk vulnerability if adding an independent unfair background riskto wealth raises his level of this type of higher-order risk aversion. We derive necessaryand sufficient conditions for all types of higher-order risk vulnerabilities and explaintheir behavioral implications. We find that as in the case of risk vulnerability, allfamiliar HARA utility functions have all types of higher-order risk vulnerabilitiesexcept for a type of third-order risk vulnerability corresponding to a downside riskaversion measure called the Schwarzian derivative.
KW - Background risk
KW - Downside risk aversion
KW - Downside risk vulnerability
KW - Higher-order risk vulnerability
U2 - 10.1007/s00199-015-0935-2
DO - 10.1007/s00199-015-0935-2
M3 - Journal article
VL - 63
SP - 387
EP - 406
JO - Economic Theory
JF - Economic Theory
SN - 0938-2259
IS - 2
ER -