Date of Award
6-29-2020
Degree Type
Thesis
Degree Name
Master of Philosophy (MPHIL)
Discipline
Business
Department
Finance and Insurance
First Advisor
Prof. LI Jingyuan
Abstract
I extend the classical risk vulnerability definition proposed by Gollier and Pratt (1996) and suggest a new definition namely risk invulnerability, which is to say a desirable background risk that has a positive mean value exceeding the precautionary saving premium makes a decision maker less risk averse with respect to other independent risk. While the value function used in Milne and Robertson (1996) is comparable to the von Neumann Morgenstern utility function used in risk invulnerability, I follow the literature and show that a corporate under stochastic wealth and threat of liquidation is risk invulnerable when the wealth level of this company does not meet the dividend payment threshold. In light of this general case, I propose a specific application of an insurance company suggested by Rochet and Villeneuve (2011), which is facing a zero-or-full reinsurance strategy because of a huge risk. I first confirm that a non-dividend paying insurance company is risk invulnerable, and then investigate the effect of reinsurance on risk invulnerability. I propose that, when the insurance company switch its reinsurance strategy from zero to full coverage, there is an instant decrease in the level of risk invulnerability reflected by the change of magnitude of the corresponding conditions.
Keywords
Risk invulnerability, desirable risk, increasing absolute prudence, intemperance, corporate value
Language
English
Copyright
The copyright of this thesis is owned by its author. Any reproduction, adaptation, distribution or dissemination of this thesis without express authorization is strictly prohibited.
Recommended Citation
Hui, S. K. (2020). Risk invulnerability: The impact of a desirable background risk (Master's thesis, Lingnan University, Hong Kong). Retrieved from https://commons.ln.edu.hk/otd/82/