Document Type
Working paper
Source Publication
CIRRELT
Publication Date
4-2011
Keywords
Expected utility theory; first-order conditional dependent risk aversion; background risk; risk diversification
Abstract
In the literature, utility functions in the expected utility class are generically limited to second-order (conditional) risk aversion, while non-expected utility functions can exhibit either. First-order or second-order (conditional) risk aversion. This paper extends the concepts 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. We relate our results to risk diversification and provide additional insights into its application in different economic and finance examples.
Publisher Statement
Copyright © Dionne, Li and CIRRELT, 2011.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Dionne, G., & Li, J. (2011). First-order (conditional) risk aversion, backround risk and risk diversification (CIRRELT-2011-24). Canada: CIRRELT. Retrieved from https://www.cirrelt.ca/DocumentsTravail/CIRRELT-2011-24.pdf