Higher-order risk attitudes toward correlation
2013 American Risk and Insurance Association Annual Meeting
higher-order risk attitudes; stochastic dominance dependence; correlation; covariance
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.
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Li, J. (2013). Higher-order risk attitudes toward correlation. Paper presented at 2013 American Risk and Insurance Association Annual Meeting, Washington, DC. Abstract retrieved from http://www.aria.org/meetings/2013_Annual_Meeting_docs/TuesdaySession_VD/SessionVDHigher-OderRiskAttitudestowardCorrelation-Paper.pdf