Document Type
Journal article
Source Publication
Journal of Economic Theory
Publication Date
11-1-2014
Volume
154
First Page
403
Last Page
422
Keywords
Background risk, Consumption risk in business cycles, Equity premium puzzle, Expected utility theory, First-order conditional dependent risk aversion, Rank-dependent expected utility model
Abstract
Expected utility functions are limited to second-order (conditional) risk aversion, while non-expected utility functions can exhibit either first-order or second-order (conditional) risk aversion. We extend the concept of orders of conditional risk aversion to orders of conditional dependent risk aversion. We show that first-order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis. Our theoretical result proposes new insights into economic and financial applications such as the equity premium puzzle, the cost of business cycles, and stock market participation. Our model is compared to the rank-dependent expected utility model.
DOI
10.1016/j.jet.2014.09.019
Print ISSN
00220531
E-ISSN
10957235
Publisher Statement
Copyright © 2014 Elsevier Inc.
Access to external full text or publisher's version may require subscription.
Additional Information
This paper is also available at Social Science Research Network at http://ssrn.com/abstract=2197741
Full-text Version
Accepted Author Manuscript
Language
English
Recommended Citation
Dionne, G., & Li, J. (2014). When can expected utility handle first-order risk aversion? Journal of Economic Theory, 154, 403-422. doi: 10.1016/j.jet.2014.09.019