Local Utility and Multivariate Risk Aversion
National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE)
Sciences Po - Department of Economics
Université de Montréal, CIREQ, CIRANO
June 18, 2012
CIRANO - Scientific Publications 2012s-17
We revisit Machina's local utility as a tool to analyze attitudes to multivariate risks. Using martingale embedding techniques, we show that for non-expected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is equivalent to the concavity of the local utility functions, thereby generalizing Machina's result. To analyze comparative risk attitudes within the multivariate extension of rank dependent expected utility, we extend Quiggin's monotone mean and utility preserving increases in risk and show that the useful characterization given still holds in the multivariate case.
Number of Pages in PDF File: 21
Keywords: local utility, multivariate risk aversion, multivariate rank dependent utility, pessimism, multivariate Bickel-Lehmann dispersion
JEL Classification: D63, D81, C61working papers series
Date posted: July 18, 2012 ; Last revised: July 25, 2012
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