Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules
28 Pages Posted: 19 May 2006
Date Written: May 18, 2006
Abstract
We study the representative consumer's risk attitude and efficient risk-sharing rules in a single-period, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumer's individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions.
Keywords: aggregation, heterogeneous consumers, absolute risk tolerance, mutual fund theorem
JEL Classification: D51, D58, D81, G11, G12, G13
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Guntar Franke, Richard C. Stapleton, ...
-
Option Bounds and Second Order Arbitrage Opportunities
By James Huang and Zhengjun Zhang
-
Risk Neutral Probabilities and Option Bounds: A Geometric Approach
By James Huang
-
Stochastic Dominance Option Bounds and Nth Order Arbitrage Opportunities
By James Huang
-
Option Bounds from Concurrently Expiring Options When Relative Risk Aversion is Bounded
By James Huang
-
Dara and Drra Option Bounds from Concurrently Expiring Options
By James Huang
-
Model Risk: A Conceptual Framework for Risk Measurement and Hedging
By Nicole Branger and Christian Schlag
-
Impact on Option Prices of Divergent Consumer Confidence: A Note
By James Huang
-
Collective Investment Decision Making with Heterogenous Time Preferences