Title

Higher-order risk attitudes toward correlation

Document Type

Other

Source Publication

Social Science Research Network

Publication Date

6-1-2013

Keywords

higher-order risk attitudes, stochastic dominance dependence, correlation, covariance

Abstract

Higher-order risk attitudes other than risk aversion (e.g., prudence and temperance) play vital roles both in theoretical and empirical work. While the literature has mainly focused on how they entail a preference for combining “good” outcomes with “bad” outcomes, we consider here an alternative approach which relates higher-order risk attitudes to the sign of correlation. The theoretical result in this paper proposes new insights into economic and financial applications such as risk aversion in the presence of another risk, bivariate stochastic dominance and justifying the first-order approach to moral hazard principal-agent problems.

DOI

10.2139/ssrn.2270995

Publisher Statement

Copyright © 2013 Social Science Electronic Publishing, Inc

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Full-text Version

Publisher’s Version

Recommended Citation

Li, J. (2013). Higher-order risk attitudes toward correlation. Social Science Research Network. Retrieved from http://dx.doi.org/10.2139/ssrn.2270995